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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31, 1998.
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-23828
LABOR READY, INC.
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(Exact name of registration as specified in its Charter)
Washington 91-1287341
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(State of Incorporation of Organization) (I.R.S. Employer
Identification Number)
1016 S. 28th Street, Tacoma, Washington 98409
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(Address of Principal Executive Offices) (Zip Code)
(253) 383-9101
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(Registrant's Telephone Number)
Securities Registered Under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, No Par Value The New York Stock Exchange
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Securities Registered Under Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
None None
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Indicated by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the last ninety days.
YES X NO .
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The aggregate market value (based on the NYSE quoted closing price) of the
common stock held by non-affiliates (24,477,289 shares) of the Registrant at
March 15, 1999 was approximately $654.8 million. As of March 15, 1999, there
were 28,218.982 shares of the Registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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LABOR READY, INC.
FORM 10-K
PART I.
ITEM 1. BUSINESS
Information in this Annual Report on Form 10-K includes forward-looking
statements, which are often identified by the words "believes", "anticipates"
and similar expressions. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Factors which could affect the Company's financial results are
described below and in Item 7 of this report. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrences of unanticipated events.
INTRODUCTION
Labor Ready, Inc. (the "Company"), incorporated in Washington in 1985, is a
leading national provider of temporary workers for manual labor jobs. The
Company's customers are primarily businesses in the freight handling,
warehousing, landscaping, construction and light manufacturing industries. These
businesses require workers for lifting, hauling, cleaning, assembling, digging,
painting and other types of manual or unskilled work. The Company has rapidly
grown from eight dispatch offices in 1991 to 486 dispatch offices at December
31, 1998. All of the growth in dispatch offices was achieved by opening
Company-owned locations rather than through acquisitions. The Company's revenues
have grown from $6.0 million in 1991 to $606.9 million in 1998. This revenue
growth has been generated both by opening new dispatch offices and by continuing
to increase sales at existing dispatch offices. In 1998, the average cost to
open a new dispatch office was approximately $45,000 and dispatch offices opened
in 1998 typically generated revenues sufficient to cover their operating costs
within six months. In 1998, the average revenue per dispatch office open for
more than one full year was approximately $1.6 million ($1.4 million in 1997).
INDUSTRY OVERVIEW
The temporary staffing industry has grown rapidly in recent years as
companies have used temporary employees to control personnel costs and to meet
fluctuating personnel needs. According to the STAFFING INDUSTRY REPORT (May
1998), the United States' market for the industrial segment of the temporary
staffing marketplace (which includes the short-term, light industrial market
that the Company serves) grew at a compound annual growth rate of approximately
17% from approximately $6.0 billion in 1992 to an estimated $14.6 billion in
1998. The Company believes the short-term light industrial segment of the
temporary staffing industry is highly fragmented and presents opportunities for
larger, well capitalized companies to compete effectively, mainly through the
development of information systems which efficiently process a high volume of
transactions and coordinate multi-location activities, and the management of
workers' compensation costs.
Historically, the demand for temporary workers has been driven primarily by
the need to satisfy peak production requirements and to temporarily replace
full-time employees absent due to illness, vacation or abrupt termination. More
recently, competitive pressures have forced businesses to focus on reducing
costs, including converting fixed, permanent labor costs to variable or flexible
costs. The use of temporary workers typically shifts employment costs and risks,
such as workers' compensation and unemployment insurance and the possible
adverse effects of changing employment regulations, to temporary staffing
companies, which can allocate those costs and risks over a larger pool of
employees and customers. In addition, through the use of temporary employees,
businesses avoid the inconvenience and expense of hiring and firing regular
employees.
COMPANY STRATEGY
The Company's goal is to maintain and enhance its status as a leading
national provider of temporary workers for manual labor jobs. Key elements of
the Company's strategy to achieve this objective are as follows:
- - AGGRESSIVELY OPEN NEW DISPATCH OFFICES. The Company's strategy is to
increase revenues by rapidly expanding its network of dispatch offices.
From January 1, 1999 to March 15, 1999, the Company has opened 142 new
dispatch offices and plans to open approximately 58 additional dispatch
offices during the first half of the year. The Company plans to open 200
dispatch offices in 2000.
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- - INCREASE REVENUES FROM EXISTING DISPATCH OFFICES. As each dispatch office
matures, the Company attempts to increase its revenues by expanding sales
to existing customers and by aggressively expanding the number and mix of
customers served. More experienced area directors and district managers
assist the dispatch office general manager in this process. The Company
also employs coordinated sales and marketing strategies designed to
complement these efforts, including the development of national accounts,
and targeted direct mail and telemarketing campaigns.
- - IMPROVE OPERATING EFFICIENCIES AND REDUCE OPERATING COSTS. Due to the
short-term temporary labor market's extensive fragmentation, the Company
believes its national presence provides it with key operating efficiencies,
competitive advantages (including an ability to target national accounts
and to administer effectively workers' compensation programs) and access to
capital markets to provide needed working capital. The Company has
standardized the operation, general design, staffing and equipment of its
dispatch offices. In addition, the Company has designed and implemented a
proprietary management information system that efficiently manages an
extensive, Company-wide employee, payroll, sales and customer database and
provides management with valuable, timely management reporting.
- - PROVIDE SUPERIOR SERVICE. The Company emphasizes customer responsiveness
and maintains a commitment to providing a superior quality of service
through policies such as opening offices no later than 5:30 a.m. and
extending hours of operation to 24 hours, 7 days per week where the market
demands. One of the Company's competitive advantages is that it is able to
provide workers on short notice (often the same day as requested) and
offers a "satisfaction guaranteed" policy. The Company is committed to
supplying motivated workers to its customers. Most workers find the
Company's "Work Today, Paid Today" policy appealing and arrive at the
dispatch office early in the morning motivated to put in a good day's work
and receive a paycheck at the end of the day. With the introduction of an
automated Cash Dispensing Machine ("CDM") at each dispatch office in 1998,
workers find the Company's policy of "Work Today, Cash Today" even more
appealing.
- - AGGRESSIVELY RECRUIT TEMPORARY WORKERS. During 1998, the Company installed
a cash dispensing machine in all of its dispatch offices in the United
States. With the CDMs in operation, workers have a choice of a daily
paycheck or cash payment through the CDM. The Company retains the change on
each worker's daily pay plus $1 for the service. Management believes the
CDM program will enhance the Company's ability to attract temporary
workers. In 1998, the Company wrote approximately 6.5 million payroll
checks for its temporary workers. Implementation of the CDMs has
significantly reduced the number of payroll checks the Company would have
otherwise processed.
The Company intends to continue to focus on the short-term, light
industrial manual labor niche of the temporary labor market. The Company
believes other national and international temporary labor businesses have not
aggressively pursued this market. Management believes that it can gain
significant advantages by capturing market share, achieving economies of scale
and other operating efficiencies not available to its smaller competitors and by
rapidly expanding through opening new dispatch offices and increasing revenue at
existing dispatch offices.
DISPATCH OFFICE EXPANSION
The Company has rapidly grown from 17 dispatch offices in 1993 to 486
dispatch offices at December 31, 1998. The Company's expansion has been achieved
primarily by opening Company-owned dispatch offices. The following table sets
forth the number and location of dispatch offices by geographic region open at
the end of each of the last five years. The information below does not include
four Labor Ready franchised dispatch offices located in the Minneapolis/St.
Paul, Minnesota metropolitan area and one franchised dispatch office located in
Fargo, North Dakota.
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LABOR READY DISPATCH OFFICES
BY GEOGRAPHIC REGION
AT DECEMBER 31,
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1994 1995 1996 1997 1998
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Northwest . . . . . . . . . . . . . . . . . . . . . . 17 25 27 42 51
California . . . . . . . . . . . . . . . . . . . . . 9 22 30 43 72
Central . . . . . . . . . . . . . . . . . . . . . . . 10 23 40 51 70
Midwest . . . . . . . . . . . . . . . . . . . . . . 2 6 26 45 69
Mid-Atlantic . . . . . . . . . . . . . . . . . . . . 8 14 38 54 70
Southeast . . . . . . . . . . . . . . . . . . . . . 1 11 29 45 66
Northeast . . . . . . . . . . . . . . . . . . . . . . 0 1 2 22 50
Atlantic . . . . . . . . . . . . . . . . . . . . . . 0 0 4 6 27
Canada . . . . . . . . . . . . . . . . . . . . . . . 4 4 4 8 11
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Total. . . . . . . . . . . . . . . . . . . . 51 106 200 316 486
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The Company currently anticipates opening 200 dispatch offices during the
first half of 1999, and 200 dispatch offices in 2000. Dispatch office openings
in 1999 will be primarily in the Northeast, Southeast, Midwest and California.
The Company analyzes acquisition opportunities, and from time to time, may
pursue acquisitions in certain circumstances and may also accelerate expansion
based on future developments.
In 1994, the Company licensed one franchisee in Minnesota, who now operates
five locations, four in Minneapolis/St. Paul and one in Fargo, North Dakota. The
Company has not pursued, and does not intend to grant, any additional
franchises. Revenues generated from franchised dispatch offices have not been
significant during the periods presented herein.
ECONOMICS OF DISPATCH OFFICES. The Company has standardized the process of
opening dispatch offices. In 1998, the average aggregate cost of opening a new
dispatch office was approximately $45,000. Approximately $13,000 of these costs
includes salaries, recruiting, testing, training, lease and other related costs,
which have been capitalized as dispatch office pre-opening costs and amortized
using the straight-line method over two years. The remaining approximately
$32,000 of the cost of opening a dispatch office includes computer systems and
other equipment related costs, leasehold improvements and a cash dispensing
machine and related equipment. These costs are not expected to increase
significantly in 1999. New dispatch offices are expected to generate revenue
sufficient to cover their operating costs within six months. On average, the
volume necessary for profitable operations is approximately $12,000 per week.
In 1998, dispatch offices open for at least one full year generated average
annual revenue of approximately $1.6 million ($1.4 million in 1997) or
approximately $31,000 per dispatch office, per week ($27,000 per dispatch
office, per week in 1997).
CRITERIA FOR NEW DISPATCH OFFICES. Labor Ready identifies desirable areas
for locating new dispatch offices with an economic model that analyzes the
potential supply of temporary workers and customer demand based on a zip code
resolution of employment figures, demographics and the relative distance to the
nearest Labor Ready dispatch office. In addition, the Company locates dispatch
offices in areas convenient for its temporary workers, which are on or near
public transportation, and have parking available. After the Company establishes
a dispatch office in a metropolitan area, the Company usually clusters
additional locations within the same area. Multiple locations in a market reduce
both opening costs and operating risk for new dispatch offices because direct
mail and other advertising costs are spread among more dispatch offices and
because the new dispatch office benefits from existing customer relationships
and established Labor Ready brand recognition.
DISPATCH OFFICE MANAGEMENT. The Company believes that the key factor
determining the success of a new dispatch office is identifying and retaining an
effective dispatch office general manager. Each general manager has primary
responsibility for managing the operations of the dispatch office, including the
recruiting and daily dispatch of temporary workers, sales and accounts
receivable collection. The Company pays monthly bonuses to its general managers
based on accounts receivable collections during the month.
Each general manager has primary responsibility for customer service and
the dispatch office's sales efforts, including identifying and soliciting local
businesses likely to have a need for temporary manual workers. The Company's
experience is that certain types of individuals are better suited to perform the
critical management functions necessary for the dispatch office to generate the
revenues required to achieve profitability, regardless of the size of the
metropolitan area. The Company has refined its criteria for selecting general
managers and uses a profiling system to screen, test, and qualify prospective
general managers. The Company commits substantial resources to the training,
development, and operational support of its general managers.
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OPERATIONS
DISPATCH OFFICES. Dispatch offices are locations where workers (and
prospective workers) report prior to being assigned to jobs, including those
being called back to the same employer. Workers are required to report to the
dispatch office in order to minimize "no-shows" to the customer's job site. If a
worker fails to report to the dispatch office as scheduled, the Company
identifies a replacement so that the customer has the number of workers expected
at the job site, on time, and ready to work.
During the early morning hours, the general manager and an assistant
coordinate incoming customer work orders, assign the available workers to the
job openings for the day, and arrange transportation to the job site. Prior to
dispatch, a branch employee checks to make sure workers have the basic safety
equipment required for the job, such as boots, back braces, hard hats, or safety
goggles, all of which are provided at no charge to the worker and the customer.
The customer provides additional safety and other equipment, if required. New
assignments are filled from a daily sign-in sheet, considering customer requests
for specific temporary workers on repeat work orders or new engagements.
Workers who pass on a particular job are moved to the bottom of the list.
Most work assignments have been scheduled in advance; a majority of which are
repeat work orders from customers. However, a significant portion of job
openings are requested on short notice, often the same day as the workers are
needed at the job site.
The workers are provided with a work order, which is endorsed by the
customer to confirm work performance, and which must be presented at the
dispatch office in order to receive payment for the hours worked. Workers are
generally paid daily by check, and with the addition of a CDM at each dispatch
office, workers have the choice of being paid each day in cash. Computer systems
at each dispatch office perform the calculations necessary to determine the
wages, less taxes and applicable withholdings, and print security-controlled
checks, which are distributed to each worker. Alternatively, the system prints a
payroll voucher which contains a unique security code. The worker enters the
code into the CDM and is disbursed his or her net pay, less the change and $1
for the CDM service.
Dispatch offices generally open early, usually by 5:30 a.m., with some open
24 hours depending on market demand, and generally remain open until the last
temporary laborer is paid. Dispatch offices are generally staffed with at least
two full-time employees, including the general manager and a customer service
representative. General managers manage the daily dispatch of temporary workers,
and are responsible for monitoring and collecting receivables, managing the
credit application process for each customer, inspecting customer job sites for
site safety, as necessary, and managing the sales and marketing efforts of the
dispatch office.
Employment applications are taken throughout the day for potential new
temporary employees. Applications are used to facilitate workers' compensation
safeguards and quality control systems by permitting the Company to test for
alcohol or drugs in case of a work-related illness or injury, to obtain a signed
"Condition of Employment" statement, and to comply with applicable immigration
requirements.
CUSTOMERS. The Company's customers are primarily businesses that require
workers for lifting, hauling, cleaning, assembling, digging, painting and other
types of manual or unskilled work. The Company's customers are primarily
businesses in the freight handling, warehousing, landscaping, construction and
light manufacturing industries. Over the past several years, the Company has
been diversifying its customer base to include more customers in the retail,
wholesale, sanitation, printing, and hospitality industries.
New dispatch offices initially target virtually all businesses in its
market area with direct mail and telemarketing campaigns. Dispatch office
general managers, and the regional and national sales force are responsible for
following up the marketing campaigns with telephone or personal calls.
Frequently, a new dispatch office will have a high concentration of customers in
the construction industry. As dispatch offices mature, the customer base
broadens and the mix of work diversifies. Many customers have elements of
seasonality in their workflow, especially customers in the construction and
landscaping industries. The Company currently derives its business from a large
number of customers, and is not dependent on any single large customer for more
than 2% of its revenues. During 1998, the Company's ten largest customers
accounted for sales of $28.5 million, or 4.7% of total revenues ($20.9 million,
or 6.2% of total revenues in 1997). While a single dispatch office may derive a
substantial percentage of its revenues from a single customer, the loss of that
customer would not have a significant impact on the Company's revenues. During
1998, the Company provided temporary workers to in excess of 190,000 customers.
Labor Ready filled more than 4.8 million work orders in 1998 (2.8 million in
1997).
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Many customers use Labor Ready to screen prospective employees for future
permanent hires. Because Labor Ready does not charge a fee if a customer hires a
Company worker, customers on occasion send prospective employees to the Company
with a specific request for temporary assignment to their business. Customers
thereby have the opportunity to observe the prospective employee in an actual
working situation, minimizing the expense of employee turnover and personnel
agency fees.
BILLING AND COLLECTIONS. The Company has implemented an automated credit
and collections system that allows each dispatch office to establish a credit
limit for new customers by telephonically accessing a computer based credit
system. Initial credit limits are based on a credit-scoring matrix developed by
the Company. No workers are dispatched without using this system. Credit limits
range from COD to $100,000. The credit department, using other credit reporting
agencies, bank/trade references and balance sheet analysis, reviews and approves
additional credit extensions beyond those recommended by this system. Once a
customer has reached 75% of its credit limit, the customer screen on the
Company's information system has a red warning to alert the dispatch office to
monitor more closely the activity of the customer.
SALES AND MARKETING. Each dispatch office is responsible for its own sales
and marketing efforts in its local market area. The dispatch office general
manager is primarily responsible for sales and customer service, with all branch
employees being involved in sales and customer relations. The Company purchases
a direct marketing database, and from a centralized direct mail department,
conducts an intensive direct-mail campaign in the local market area of each
dispatch office. For new dispatch offices, the direct-mail campaign targets
virtually all businesses in its local market area. Follow-up mailings target
business in the Company's traditional market niche. Follow-up telephone and
personal calls on qualified leads are made by the dispatch office general
manager and the Company's sales force.
The Company currently employs approximately 70 sales personnel at the
dispatch offices and 3 sales professionals who focus exclusively on sales to
customers whose operations are national in scope and who therefore need workers
in multiple locations throughout the United States and Canada. Additionally, the
Company employs one sales professional whose efforts are devoted to developing
new customers in the marine industry.
When entering new markets, the Company allows for an initial advertising
budget to generate an awareness of the new dispatch office. When opening
additional offices as warranted, based on area demographics, the Company can
also expand and coordinate its marketing efforts to the benefit of other
established offices in the local area. Marketing is accomplished primarily
through telemarketing and direct-mail campaigns, yellow-page advertising,
personal sales contacts, word of mouth, and billboard advertising.
TEMPORARY WORKERS. Most workers find the Company's "Work Today, Paid Today"
policy appealing and arrive at the dispatch office early in the morning
motivated to put in a good day's work and receive a paycheck or a CDM voucher
for cash at the end of the day. Labor Ready's temporary workers are frequently
persons who are unemployed or in between jobs. The majority of the workers are
male and most are between the ages of 18 and 40 and live in low-income
neighborhoods.
The Company's daily pool of temporary workers at each dispatch office
generally numbers between 40 and 200, depending upon the time of year. Because
of increasing diversification of the Company's customer base and a wider
dispersion of dispatch offices in different geographic areas of the United
States, the Company is less dependent on weather than in its early years. Good
weather, nevertheless, brings incrementally more job orders and workers.
Consequently, the Company is busiest in the late spring, summer and early fall.
After reviewing work orders for that day's customer requests, the dispatch
office general manager prescreens the qualifications of the available temporary
workers to assure that they can perform the work required. Additionally, the
individual must be at least 18 years old, physically capable and in apparent
good health. The main objective is to dispatch the most suitable workers for the
positions available. Dispatch office employees over time come to know most
workers at the dispatch office and their capabilities. The Company is an equal
opportunity employer.
Under the Company's "satisfaction guaranteed" policy, replacements for all
unsatisfactory workers are promptly provided if the customer notifies the
Company within the first two hours of work. Employees who receive two complaints
from customers are generally reprimanded or terminated. The Company will
immediately terminate any employee who agrees to take a work order and does not
report at the customer's job site. Any use of obscene language, alcohol or drugs
on the dispatch office premises or at the customers' job sites are grounds for
immediate dismissal. The Company lists workers who were terminated in a central
database to prevent rehire by other dispatch offices.
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The Company withholds FICA and federal, state, and, where applicable, city
and county income taxes from its temporary workers' wages for disbursement to
governmental agencies. Additionally, the Company maintains federal and state
unemployment insurance, and workers' compensation coverage for its temporary
employees.
RECRUITMENT OF TEMPORARY WORKERS. The Company attracts its pool of
temporary workers through billboard advertisements, flyers, newspaper
advertisements, dispatch office displays, and word of mouth. The Company
believes its strategy of locating dispatch offices in areas convenient for its
workers, with ready access to public transportation, is particularly important
in attracting workers.
The Company's "Work Today, Paid Today" policy is prominently displayed at
most dispatch offices and, in the Company's experience, is a highly effective
method of attracting temporary workers. With the addition of a CDM at each
dispatch office, management believes that the Company's "Work Today, Cash Today"
policy is an added incentive for temporary workers. Workers also find other
Company policies attractive, such as the emphasis on worker safety, including
Company provided safety training and equipment, and modest cash advances for
lunch or gas to workers short on cash. Temporary workers are also aware of the
Company's no-fee policy toward customers who offer temporary workers a regular
position. The possibility of landing a regular position serves as an added
incentive to the Company's workers.
Management believes that Labor Ready has earned a good reputation with its
temporary laborers because the Company consistently has jobs available and
treats its workers with respect. The Company believes this also helps attract a
motivated and responsive workforce. As a result, the Company believes referrals
by current or former temporary workers who have had good experience with the
Company account for a significant percentage of its recruiting successes.
The Company experiences from time to time, during peak periods, shortages
of available temporary workers. Dispatch offices with a shortage of workers
attempt to fill work orders by asking temporary workers to inform friends,
relatives and neighbors of job openings and by identifying prospective workers
from the Company's employee data base. On occasion, work orders requiring large
numbers of temporary workers will be filled through coordination with other
local dispatch offices.
MANAGEMENT, EMPLOYEES AND TRAINING. At December 31, 1998, the Company
employed a total of 121 administrative and executive staff in the corporate
office, and 2,185 people as supervisors, general managers, customer service
representatives, district managers, area directors and support staff. General
managers report to district managers who in turn report to area directors. The
Company's recruiting focus is on hiring additional management and supervisory
personnel with experience in managing multi-location operations.
After extensive interviews and tests, prospective district and general
managers undergo approximately two weeks of training at the Company's training
center which is located at the corporate office in Tacoma, Washington and two
weeks of on-the-job training at a dispatch office. The training center is
charged with providing the managers with all of the skills necessary for
operating a dispatch office. Staffed by experienced training professionals, the
training center has developed a curriculum, training manuals, and instruction
modules for the training program, which include rigorous sessions on topics such
as marketing and direct mail, credit and collections, payroll and personnel
policies, workers' compensation management and safety. Customer service
representatives receive on-the-job training at the branch where they work.
MANAGEMENT INFORMATION SYSTEMS. The Company has developed its own
proprietary system to process all required credit, billing, collection,
temporary worker payroll and related payroll tax returns, together with other
management information and reporting systems necessary for the management of
hundreds of thousands of workers and staff in multiple locations. The Company
plans to complete the installation of the next generation, client server version
of this software in all dispatch offices in 1999. The upgrade of hardware at all
dispatch offices, to dedicated servers running Microsoft's Windows NT Server
Version 3.51 and multiple stations running Microsoft's Windows 95, was completed
in 1996 in preparation of the new client server software. During 1997, the
Company added a third workstation to most dispatch offices and provided laptop
computers to all its area directors. Additionally, during 1997, the Company
successfully implemented a new client server based financial reporting and
management information system which includes general ledger and accounts payable
modules, and budget/actual comparison reporting by dispatch office. Further
add-on systems and programs are planned and in process to enhance purchasing
management, property and equipment accounting, enable real-time management
reporting for district managers and transition to electronic data interchange
with the Company's customers and vendors.
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During 1998, the Company increased its MIS department to twenty full-time
professionals who continually upgrade the systems and add features and enhance
operations and reliability. The operations and financial reporting systems will
continue to require additional hardware and software to accommodate the
Company's operating and information needs while the Company conducts its rapid
expansion program.
The system maintains all of the Company's key databases from the tracking
of work orders to payroll processing to maintaining worker records. The system
regularly exchanges all point of sale information between the corporate
headquarters and the dispatch offices, including customer credit information and
outstanding receivable balances. Dispatch offices can run a variety of reports
on demand, such as receivables aging, margin reports, and customer activity
reports. Area directors and district managers can also call into the system and
monitor their territories from the field. The Company believes its proprietary
software system provides Labor Ready with significant competitive advantages
over competitors that utilize less sophisticated systems.
The Company's information system also provides the Company with key
internal controls. All work order tickets are entered into the system at the
dispatch office level. No payroll check can be issued at a dispatch office
without a corresponding work ticket on the computer system. When a payroll check
or CDM voucher is issued, the customer's weekly invoice and the dispatch office
receivables ledger are automatically updated. Printed checks have watermarks and
computer-generated signatures that are difficult to duplicate. The Company has
developed a proprietary system, which beginning in 1998 allows the payroll
software to generate either a payroll check, or at the workers' option, a cash
withdrawal from the dispatch office's CDM. The Company has filed a patent
application for this system of controlling the CDMs for the disbursement of
payroll funds. All cash receipts are received in lockbox accounts and are
matched to customers' receivable records using an automated data capture system.
WORKERS' COMPENSATION PROGRAM. The Company provides workers' compensation
insurance to its temporary workers and regular employees. For workers'
compensation claims originating in the majority of states (the 43
non-monopolistic states), the Company has purchased a deductible insurance
policy. Under terms of the policy, the Company's workers' compensation exposure
is limited to a deductible amount per occurrence and a maximum aggregate
stop-loss limit. Should any single occurrence exceed the deductible amount per
occurrence, all losses and expenses beyond the deductible amount are paid by
independent insurance companies unrelated to the Company. Similarly, should the
total of paid losses related to any one year period exceed the maximum aggregate
stop-loss limit for that year, all losses beyond the maximum aggregate stop-loss
limit are paid by independent insurance companies unrelated to the Company. In
1997, the per occurrence deductible amount was $250,000 per claim, to an
aggregate maximum of $11.60 per $100 of temporary worker payroll, or $18.8
million. For claims arising in 1998, the per occurrence deductible amount was
increased to $350,000 and the maximum aggregate stop-loss limit was reduced to
$10.41 per $100 of temporary worker payroll, or $31.7 million.
For claims arising in years prior to 1997, the Company has insured all losses
beyond amounts reserved in its financial statements with independent insurance
companies unrelated to the Company. The difference between the discounted
maximum aggregate stop-loss limit for claims arising in 1997 and 1998 and the
total of claims paid and reserved for in the Company's financial statements for
the same periods is $4.0 million. This amount represents the discounted maximum
additional exposure, net of tax, to the Company before its maximum aggregate
stop-loss limits are met for all periods before December 31, 1998.
The Company establishes its reserve for workers' compensation claims using
actuarial estimates of the future cost of claims and related expenses that have
been reported but not settled, and that have been incurred but not reported.
Adjustments to the claims reserve are charged or credited to expense in the
periods in which they occur. Included in the accompanying consolidated balance
sheets as of December 31, 1998 and 1997, are workers' compensation claims
reserves in the non-monopolistic states of $24.4 million and $12.9 million,
respectively. The claims reserves were computed using a discount rate of 6.0% at
December 31, 1998 and 1997.
Workers' compensation expense totaling $30.6 million, $19.2 million and $10.0
million was recorded as a component of cost of services in each of the years
ended December 31, 1998, 1997 and 1996, respectively.
For the 1997 and 1998 program years, the Company is required to provide
collateral in the amount of the maximum aggregate stop-loss limits, less claims
paid to date. The Company provides approximately 50% of the required collateral
in the form of a surety bond, and 50% in letters of credit. Accordingly, at
December 31, 1998, $14.5 million of the collateral was satisfied with surety
bonds and $12.6 million was satisfied with letters of credit for the years ended
December 31, 1998 and 1997.
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For workers' compensation claims originating in Washington, Ohio, and
West Virginia (the monopolistic states), and Canada and Puerto Rico, the
Company pays workers' compensation insurance premiums as required by state
administered programs. The insurance premiums are established by each
jurisdiction, generally based upon the job classification of the insured
workers and the previous claims experience of the Company. The Washington
program provides for a retroactive adjustment of workers' compensation
payments based upon actual claims experience. Upon adjustment, overpayments to
the program are returned to the Company and underpayments, if any are
assessed. At December 31, 1998 and 1997, the Company recorded workers'
compensation credit receivables of $1.4 million and $1.1 million respectively,
and workers' compensation liabilities of $1.2 million and $0.6 million
respectively, related to the monopolistic states.
In December 1998, the Company purchased a deductible insurance policy for
the non-monopolistic states covering the years ended 1999 and 2000. The policy
includes substantially the same terms and limitations as the 1998 policy
described above except that the Company is required to provide collateral in the
amount of 60% of claims reserves. The collateral for the 1999 program will
consist of 50% letters of credit and 50% surety bond. Accordingly, subsequent to
year end, the Company provided the insurance carrier with a letter of credit
totaling $4 million and a surety bond for $12.5 million. During 1999, the total
amount of the letters of credit and surety bonds for the 1999 program year will
increase to approximately $24.0 million.
The Company has established a risk management department at its corporate
headquarters to manage its insurers, third party claims administrators, and
medical service providers. To reduce wage-loss compensation claims, the Company
employs claims coordinators throughout the United States. The claims
coordinators manage the acceptance, processing and final resolution of claims
and administer the Company's return to work program. Workers in the program are
employed on customer assignments that require minimal physical exertion or
within the Company in the local dispatch office. The Company has an on-line
connection with its third party administrator that allows the claims
coordinators to maintain visibility of all claims, manage their progress and
generate required management information.
GOVERNMENT REGULATIONS
SAFETY PROGRAMS. As an employer, the Company is subject to applicable state
and/or federal statutes and administrative regulations pertaining to job site
safety. Where states do not have a safety program certified by the federal
Occupational Safety & Health Administration ("OSHA"), the Company is subject to
the standards prescribed by the federal Occupational Safety & Health Act and
rules promulgated by OSHA. However, the Company's temporary workers are
generally considered the customer's employees while on the customer's job site
for the purpose of applicable safety standards compliance.
In 1998, the Company's accident rate was approximately one incident per
7,853 man hours worked, an improvement over the Company's accident rate of
approximately one incident per 7,764 per man hours worked in 1997. The Company
continues to emphasize safety awareness, which helps control workers'
compensation costs, through training of its management employees and office
staff, safety sessions with temporary workers, issuing safety equipment,
monitoring job sites, and communicating with customers to promote job site
safety. Temporary workers are trained in safety procedures primarily by showing
safety tapes at the beginning of each day. Bulletin boards with safety-related
posters are prominently displayed. Additionally, "Tailgate" safety training
sessions are conducted at the customers' job site.
The Company maintains its own inventory of safety equipment at each
dispatch office. Standard equipment includes hard hats, metal-toed boots,
gloves, back braces, earplugs, and safety goggles. Equipment is checked out to
workers as appropriate. All construction jobs require steel-toed boots and a
hard hat. The dispatch office general manager ensures that workers take basic
safety equipment to job sites.
Dispatch office personnel are trained to discuss job safety parameters with
customers on incoming work order requests. Managers conduct job site visits for
new customer job orders and periodic "spot checks" of existing customers to
review safety conditions at job sites. Workers are encouraged to report unsafe
working conditions to the Company.
WAGE AND HOUR REGULATION. Labor Ready is required to comply with applicable
state and federal wage and hour laws. These laws require that the Company pay
its employees minimum wage and overtime at applicable rates when the employee
works more than forty hours in a workweek. In some states, overtime pay may be
required after eight or ten hours of work in a single day.
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COMPETITION
The short-term, light industrial manual labor sector of the temporary
services industry is highly fragmented and highly competitive, with limited
barriers to entry. A large percentage of temporary staffing companies serving
this sector of the industry are local operations with fewer than five offices.
Within local or regional markets, these firms actively compete with the Company
for business. The primary basis of competition among local firms is service and
the ability to provide the requested amount of workers on time, and to a lesser
extent, price. While entry into the market has limited barriers, lack of working
capital frequently limits growth of smaller competitors.
Although there are several very large full-service and specialized
temporary labor companies competing in national, regional and local markets, to
date, those companies have not aggressively expanded in the Company's targeted
market segment. However, many of these competitors have substantially greater
financial and marketing resources than those of the Company. One or more of
these competitors may decide at any time to enter or expand their existing
activities in the short-term, light industrial market and provide new and
increased competition to Labor Ready. The Company believes that, among the
larger competitors, the primary competitive factors in obtaining and retaining
customers are the cost of temporary labor, the quality of the temporary workers
provided, the responsiveness of the temporary labor company, and the number and
location of offices. The availability to the Company's customers of multiple
temporary service providers can create significant pricing pressure as
competitors compete for the available customers, and this pricing pressure could
adversely impact profit margins.
TRADEMARKS
The Company's business is not presently dependent on any patents, licenses,
franchises, or concessions. "Labor Ready," and the service mark "Work Today,
Paid Today" are registered with the U.S. Patent and Trademark Office. The
Company has filed with the U.S. Patent and Trademark Office, for registration of
the service mark "Work Today, Cash Today" and has commenced a patent application
for the system of controlling a network of CDMs for the disbursement of payroll.
ITEM 2 PROPERTIES
The Company leases virtually all of its dispatch offices. Dispatch office
leases generally permit the Company to terminate the lease on 30 days notice and
upon payment of three months rent. Certain leases have a minimum one-year term
and require additional payments for taxes, insurance, maintenance and renewal
options.
In February 1995, the Company purchased a labor dispatch building that also
serves as a warehouse facility for supplies and storage in Tacoma, Washington.
The Company also owns a 24,000 square foot facility in Tacoma, Washington that
is currently listed as available for lease or sale. In August 1996, the Company
purchased a 44,000 square foot office building and adjoining 10,000 square foot
print shop in Tacoma, Washington to accommodate the Company's continuing
expansion. The building currently serves as Labor Ready's corporate headquarters
and administrative offices. Additionally, the Company owns a dispatch office in
Kansas City, Missouri. During 1997 and 1998, the Company sold two buildings
formerly used as a dispatch offices for proceeds of $120,000 and $185,000,
respectively. Management believes all of the Company's facilities are currently
suitable for their intended use. At present growth rates, management believes
that its headquarters facility will be adequate through the year 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently subject to any material legal proceedings. The
Company may from time to time become a party to various legal proceedings
arising in the normal course of its business. These actions could include
employee-related issues and disputes with customers. The Company carries
insurance for actions or omissions of its temporary employees. Since the
temporary workers are under the supervision of the customer or its employees,
the Company believes the terms of its contracts with its customers, which
provide that the customers are responsible for all actions or omissions of the
temporary workers, limit the Company's liability. Nevertheless, any future
claims are subject to the uncertainties related to litigation and the ultimate
outcome of any such proceedings or claims cannot be predicted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock commenced trading on the New York Stock Exchange
("NYSE") on October 28, 1998. Beginning on June 12, 1996, the Company's common
stock was traded on the Nasdaq National Market and prior to that date, the
Company's common stock was traded over-the-counter. The high and low bids (for
periods before October 28, 1998) and sale prices (for periods after October 28,
1998) were as follows:
QUARTER ENDED HIGH* LOW*
------------- ----- ----
March 31, 1997 6.17 3.33
June 30, 1997 4.56 2.89
September 30, 1997 10.94 4.50
December 31, 1997 17.17 9.11
March 31, 1998 23.67 10.17
June 30, 1998 30.63 17.50
September 30, 1998 40.50 11.38
December 31, 1998 24.50 11.50
*Dollar amounts are adjusted to reflect the three-for-two stock
splits which were effective on October 24, 1997 and May 11, 1998.
The Company had 690 shareholders of record as of December 31, 1998. The
quotation information has been derived from the NYSE and Nasdaq Stock Market and
information for periods prior to October 28, 1998 does not include retail
markups, markdowns or commissions and may not be reflective of actual
transactions. No cash dividends have been declared on the Company's common stock
to date and the Company does not intend to pay a cash dividend on common stock
in the foreseeable future. Future earnings will be used to finance the growth
and development of the Company.
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ITEM 6. SELECTED FINANCIAL INFORMATION.
The following selected consolidated financial information of the Company
has been derived from the Company's audited Consolidated Financial Statements.
The Consolidated Balance Sheet as of December 31, 1998 and 1997, and the
Consolidated Statements of Income, Shareholders' Equity, and Cash Flows for the
years then ended were audited by Arthur Andersen LLP, whose report thereon
appears elsewhere herein. The Consolidated Statements of Income, Shareholders'
Equity, and Cash Flows for the year ended December 31, 1996 were audited by BDO
Seidman, LLP, whose report thereon appears elsewhere herein. The Statement of
Operations Data for the years ended December 31, 1995 and 1994, and the balance
Sheet Data at December 31, 1996, 1995 and 1994 are derived from the Company's
audited financial statements which do not appear herein. The data should be read
in conjunction with the Company's Consolidated Financial Statements and the
notes thereto, and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere herein.
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF OFFICES)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Revenues from services . . . . . . . . . . . . . . . $38,951 $94,362 $163,450 $335,409 $606,895
Gross profit . . . . . . . . . . . . . . . . . . . . 12,095 29,479 47,919 98,742 183,971
Income before taxes and extraordinary item . . . . . 1,188 3,214 3,506 12,522 33,390
Extraordinary item, net of income tax . . . . . . . . -- -- (1,197) -- --
Net income . . . . . . . . . . . . . . . . . . . . . 852 2,062 724 6,963 19,799
Earnings per common share
Basic. . . . . . . . . . . . . . . . . . . . . . . $0.05 $0.11 $0.03 $0.25 $0.71
Diluted. . . . . . . . . . . . . . . . . . . . . . $0.05 $0.10 $0.03 $0.25 $0.69
Weighted average shares outstanding (1)
Basic. . . . . . . . . . . . . . . . . . . . . . . 14,727 18,650 23,798 27,669 27,796
Diluted. . . . . . . . . . . . . . . . . . . . . . 14,727 19,559 24,433 28,167 28,666
AT DECEMBER 31,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ----------- -------- ---------- ------------
BALANCE SHEET DATA:
Current assets . . . . . . . . . . . . . . . . . . . $7,572 $20,730 $48,534 $65,617 $105,933
Total assets . . . . . . . . . . . . . . . . . . . . 8,912 26,182 64,125 80,367 130,736
Current liabilities . . . . . . . . . . . . . . . . 5,631 7,956 10,961 15,788 34,842
Long-term liabilities . . . . . . . . . . . . . . . . 319 9,695 1,572 6,538 15,397
Total liabilities . . . . . . . . . . . . . . . . . 5,950 17,650 12,533 22,326 50,239
Shareholders' equity . . . . . . . . . . . . . . . . 2,962 8,532 51,592 58,041 80,497
Cash dividends declared (2) . . . . . . . . . . . . 43 43 43 43 43
Working capital . . . . . . . . . . . . . . . . . . 1,941 12,774 37,573 49,829 71,091
OPERATING DATA: (UNAUDITED)
Revenues from dispatch offices open for full year . . $27,311 $65,798 $133,156 $280,538 $508,980
Revenues from dispatch offices opened during year. . $11,640 $28,564 $30,294 $54,871 $97,915
Dispatch offices open at period end. . . . . . . . . 51 106 200 316 486
(1) The weighted average shares outstanding have been adjusted to reflect the
three for two stock splits which were each effective on November 22, 1995,
July 7, 1996, October 24, 1997 and May 11, 1998.
(2) Represents cash dividends on the Preferred Stock. The Company has never
paid cash dividends on its Common Stock and does not anticipate that it
will do so in the foreseeable future. See Item 5 "Market for Registrant's
Common Equity and Related Stockholder Matters".
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in connection with the
Company's Consolidated Financial Statements and the notes thereto and other
financial information included elsewhere in this document.
OVERVIEW
Labor Ready is a leading national provider of temporary workers for manual
labor jobs. The Company's customers are primarily in freight handling,
warehousing, landscaping, construction, light manufacturing, and other light
industrial businesses. The Company has rapidly grown from 17 dispatch offices in
1993 to 486 dispatch offices at December 31, 1998. All of the growth in dispatch
offices was achieved by opening Company-owned locations rather than through
acquisitions. The Company's revenues grew from approximately $39.0 million in
1994 to $606.9 million in 1998. This revenue growth has been generated both by
opening new dispatch offices and by continuing to increase sales at existing
dispatch offices. In 1998, the average annual revenue per dispatch office open
for more than a full year was approximately $1.6 million (approximately $1.4
million in 1997).
The Company expects to open 200 new dispatch offices in the first half of
1999 and 200 dispatch offices in 2000. In 1998, the Company incurred costs of
approximately $7.6 million to open 170 new dispatch offices, an average of
approximately $45,000 per dispatch office. Approximately $13,000 of these costs
includes salaries, recruiting, testing, training, lease and other related costs,
which are capitalized as dispatch office pre-opening costs and amortized using
the straight-line method over two years. The remaining approximately $32,000 of
the cost of opening a dispatch office includes computer systems and other
equipment related costs, leasehold improvements and a cash dispensing machine
and related equipment. Further, once open, the Company invests significant
amounts of additional cash into the operations of new dispatch offices until
they begin to generate sufficient revenue to cover their operating costs,
generally within six months. The Company pays its temporary workers on a
daily basis, and bills its customers on a weekly basis. The average collection
cycle for 1998 was approximately 39 days. Consequently, the Company historically
has experienced significant negative cash flow from operations and investment
activities during periods of high growth. While the Company has generated net
positive cash flows from operations in each of the two years ended December 31,
1998 and 1997, the Company may experience periods of negative cash flow from
operations and investment activities while it rapidly opens dispatch offices and
may require additional sources of working capital in order to continue to grow.
See "Liquidity and Capital Resources" and "Outlook: Issues and Uncertainties -
Working Capital Requirements."
Construction and landscaping businesses and, to a lesser degree, other
customer businesses typically increase activity in spring, summer and early fall
months and decrease activity in late fall and winter months. Inclement weather
can slow construction and landscaping activities in such periods. As a result,
the Company has generally experienced a significant increase in temporary labor
demand in the spring, summer and early fall months, and lower demand in the late
fall and winter months.
Depending upon location, new dispatch offices initially target the
construction industry for potential customers. As dispatch offices mature, the
customer base broadens and the mix of work diversifies. From time to time during
peak periods, the Company experiences shortages of available temporary workers.
See "Outlook: Issues and Uncertainties -- Availability of Temporary Workers."
Cost of services includes the wages and related payroll taxes of temporary
workers, workers' compensation expense, unemployment compensation insurance, and
transportation.
Temporary workers assigned to customers remain Labor Ready employees. Labor
Ready is responsible for employee-related expenses of its temporary workers,
including workers' compensation, unemployment compensation insurance, and
Medicare and Social Security taxes. The Company does not provide health, dental,
disability or life insurance to its temporary workers. Generally, the Company
bills its customers for the hours worked by the temporary workers assigned to
the customer. Because the Company pays its temporary workers only for the hours
actually worked, wages for the Company's temporary workers are a variable cost
that increases or decreases directly in proportion to revenue. The Company has
one franchisee which operates five dispatch offices. The Company does not intend
to grant additional franchises. Royalty revenues from the franchised dispatch
offices were not material during any period presented herein.
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The typical customer order is for two temporary workers and the typical
payroll check paid by the Company is less than $50. The Company is not dependent
on any individual customer for more than 2% of its annual revenues. During 1998,
the Company provided temporary workers to in excess of 190,000 customers and
filled more than 4.8 million work orders.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented by
certain items in the Company's Consolidated Statements of Operations for the
periods indicated.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1997 1998
---------------- ------------- ------------
Revenues from services . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of services . . . . . . . . . . . . . . . 70.7 70.6 69.7
Selling, general and administrative expenses. . 26.3 25.1 23.8
Depreciation and amortization. . . . . . . . . . 1.1 1.2 1.0
Interest (income) expense and other, net . . . . (.2) (.6) .04
Income before taxes on income and
extraordinary item . . . . . . . . . . . . . 2.1 3.7 5.5
Net income . . . . . . . . . . . . . . . . . . . .4 2.1 3.2
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
DISPATCH OFFICES. The number of offices grew to 486 at December 31, 1998
from 316 locations at December 31, 1997, a net increase of 170 dispatch offices
or 53.8%. The Company estimates that its aggregate costs of opening 170 new
dispatch offices in 1998 was $7.6 million, an average of approximately $45,000
per dispatch office, compared to aggregate costs of approximately $3.8 million,
an average of approximately $33,000 per dispatch office, to open 116 new stores
in 1997. The increase in per-store costs in 1998 was primarily the result of the
addition of a cash dispensing machine and related equipment. Approximately
$13,000 of 1998 pre-opening costs includes salaries, recruiting, testing,
training, lease and other related costs, which are capitalized and amortized
using the straight-line method over two years. The remaining approximately
$32,000 of pre-opening costs includes computer systems and other equipment
related costs, leasehold improvements and a cash dispensing machine and related
equipment. The number of dispatch offices grew to 316 at December 31, 1997 from
200 locations at December 31, 1996, a net increase of 116 dispatch offices, or
58.0%. The Company estimates that its aggregate costs of opening 116 new
dispatch offices in 1997 was approximately $3.8 million (an average of
approximately $33,000 per dispatch office) compared to aggregate costs of
approximately $5.6 million (an average of approximately $60,000 per dispatch
office) to open 94 new stores in 1996. The decrease in per-store costs in 1997
was primarily the result of a shorter manager training period and the use of
regional training centers.
REVENUES FROM SERVICES. Revenues from services increased to $606.9 million
in 1998 as compared to $335.4 million in 1997, an increase of $271.5 million or
80.9%. The increase in revenues is primarily due to continued increases in
revenues from mature dispatch offices as the Company consolidates its position
in the marketplace and builds brand awareness. Additionally, the Company opened
170 new dispatch offices in 1998 and increased its average revenues per new
dispatch office from approximately $473,000 in 1997 to approximately $576,000 in
1998. In 1998, the Company opened 161 of its 170 new dispatch offices in the
first half of the year, compared to 97 dispatch offices opened in the first half
and 19 opened in the second half of 1997. Opening dispatch offices in the first
half of the year enables each new dispatch office to realize higher revenues
during the Company's busiest time of the year. Included in revenues from
services for the years ended December 31, 1998 and 1997 were CDM fees of $3.6
million and $0, respectively.
Revenues from services increased to $335.4 million for 1997 as compared to
$163.5 million for 1996, an increase of $171.9 million or 105.2%. The increase
in revenues was primarily due to continued increases in revenues from mature
dispatch offices as the Company consolidates its position in the marketplace and
builds brand awareness. Additionally, the Company opened 116 new dispatch
offices in 1997 and increased its average revenues per new dispatch office from
approximately $322,000 in 1996 to approximately $473,000 in 1997. In 1997, the
Company opened 97 of its 116 new dispatch offices in the first half of the year,
compared to 45 dispatch offices opened in the first half and 49 opened in the
second half of 1996. Additionally, the minimum wage rate was increased from
$4.75 per hour to $5.15 per hour in October 1997.
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(IN THOUSANDS)
1996 1997 1998
---------------- ------------------ --------------
Increase in revenues from dispatch offices open for full year . . . $38,794 $117,088 $173,571
---------------- ------------------ --------------
Revenues from new dispatch offices opened during year. . . . . . . . 30,294 54,871 97,915
---------------- ------------------ --------------
Total increase over prior year . . . . . . . . . . . . . . . . . . $69,088 $171,959 $271,486
---------------- ------------------ --------------
---------------- ------------------ --------------
COST OF SERVICES. Cost of services increased to $422.9 million in 1998 from
$236.7 million in 1997, an increase of $186.2 million or 78.7%. The increase in
cost of services was due largely to the 80.9% increase in revenue from 1997 to
1998. Cost of services was 69.7% of revenue in 1998 compared to 70.6% of revenue
in 1997, an improvement of .9%. Cost of services as a percentage of revenues
decreased as compared to 1997 levels as the Company's workers' compensation
claims experience continues to improve. Additionally, the Company continues to
increase sales in mature stores and improve margins as it consolidates its
position in the marketplace. Finally, the inclusion of CDM fees in revenues from
services contributed .4% to the improvement in cost of services as a percentage
of revenue from 1998 to 1997.
Cost of services increased to $236.7 million in 1997 from $115.5 million in
1996, an increase of $121.2 million or 104.9%. The increase in cost of services
was due largely to the 105.2% increase in revenue from 1996 to 1997. Cost of
services was 70.6% of revenue in 1997 compared to 70.7% of revenue in 1996. Cost
of services as a percentage of revenues remained approximately constant as
compared to 1996 levels as the Company was generally no longer required to use
introductory lower rates to attract new customers in new dispatch offices.
Additionally, cost increases including minimum wage increases, workers'
compensation and unemployment insurance rate increases are passed through to
customers as higher billing rates.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $144.2 million in 1998 as compared to $84.1 million
in 1997, an increase of $60.1 million, or 71.5%. The increase was largely due to
increases in personnel and infrastructure to support a 80.9% increase in revenue
from 1997 to 1998. Selling, general and administrative expenses were 23.8% of
revenues in 1998 as compared to 25.1% of revenues in 1997. The decrease in
selling, general and administrative expenses as a percentage of revenue is due
mainly to economies of scale on fixed and semi-fixed administrative costs.
Included in selling, general and administrative costs for the years ended
December 31, 1998 and 1997 are CDM related expenses of $1.9 million and $0,
respectively. The Company expects that selling, general and administrative
expenses as a percentage of revenues may fluctuate in future periods as the
Company from time to time upgrades its administrative capabilities to
accommodate anticipated revenue growth.
Selling, general and administrative expenses were $84.1 million in 1997 as
compared to $42.9 million in 1996, an increase of $41.2 million or 96.0%. The
increase was largely due to increases in personnel and infrastructure to support
a 105.2% increase in revenue from 1996 to 1997. Selling, general and
administrative expenses were 25.1% of revenues in 1997 as compared to 26.3% of
revenues in 1996. The decrease in selling, general and administrative expenses
as a percentage of revenue was due mainly to economies of scale on fixed and
semi-fixed administrative costs.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expenses were $6.1 million in 1998 and $4.0 million in 1997, an increase of $2.1
million or 52.5%. The increase in depreciation and amortization expense is the
result of amortization of dispatch office pre-opening costs as the Company
continued its rapid expansion by adding 170 stores in 1998. Additionally, the
Company added approximately $13.2 million in property and equipment during the
year, including information systems and equipment for the new stores, cash
dispensing machines for all of its United States' stores and enhanced management
information systems hardware and software. Included in depreciation and
amortization expense for the years ended December 31, 1998 and 1997 is
depreciation on CDMs of $.6 million and $0, respectively.
Depreciation and amortization expenses were $4.0 million in 1997 and $1.8
million in 1996, an increase of $2.2 or 122.2%. The increase in depreciation and
amortization expense is the result of amortization of dispatch office
pre-opening costs as the Company continued its rapid expansion by adding 116
stores in 1997. Additionally, the Company added approximately $4.0 million in
property and equipment during the year including information systems and
equipment for the new stores and enhanced management information systems
hardware and software.
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In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" (the
"Statement"). The Statement establishes new rules for the financial reporting of
start-up costs, and will require the Company to expense the cost of establishing
new dispatch offices as incurred and write off, as a cumulative effect of
adopting the Statement, any remaining capitalized pre-opening costs in the first
quarter of the year adopted. The Statement is effective for years beginning
after December 31, 1998 and the Company will adopt it in the first quarter of
1999. The effect of adopting the Statement will be to recognize a non-operating
expense, net of tax, of approximately $1.4 million.
INTEREST (INCOME) EXPENSE AND OTHER, NET. Interest (income) expense and
other, net was an expense of $.3 million in 1998 compared to income of $1.9
million in 1997, an increase in expense of $2.2 million. Approximately $1.2
million of the difference was due to investment income earned during 1997 on the
Company's workers' compensation deposits, which were replaced by letters of
credit and surety bonds in 1998. Additionally, the Company had lower cash
balances available for investing in 1998 due to cash balances of approximately
$15.2 million held in the CDMs at December 31, 1998 for payment of temporary
worker payroll. Finally, included in interest (income) expense and other, net is
interest expense on the CDM capital leases of $.5 million and $0 for the years
ended December 31, 1998 and 1997, respectively.
Interest (income) expense and other, net was income of $1.9 million in
1997 compared to income of $.3 million in 1996, an increase of $1.6 million or
533.3%. Approximately $1.2 million of the increase was due to investment
income earned during 1997 on the Company's workers' compensation deposits.
TAXES ON INCOME. Taxes on income increased to $13.6 million in 1998 from
$5.6 million in 1997, an increase of $8.0 million or 142.9%. The increase in
taxes was largely due to the 167.2% increase in pretax income to $33.4 million
in 1998 from $12.5 million in 1997. The Company's effective tax rate was 40.7%
in 1998 as compared to 44.8% in 1997. The decrease in the effective income tax
rate was due primarily to prior period amounts included in the 1997 tax
provision. The principal difference between the statutory federal income tax
rate and the Company's effective income tax rate result from state income taxes
and certain non-deductible expenses.
Taxes on income increased to $5.6 million in 1997 from $1.6 million (before
adjustment for the tax effect of the extraordinary item) in 1996, an increase of
$4.0 million or 250.0%. The increase in taxes was largely due to the 257.1%
increase in pretax income to $12.5 million in 1997 from $3.5 million in 1996.
The Company's effective tax rate was 44.8% in 1997 as compared to 45.7% in 1996.
The decrease in the effective income tax rate was due primarily to the decrease
in prior period amounts as a percentage of the total tax provision. The
principal difference between the effective income tax rate and the statutory
rate are adjustments to taxes resulting from prior years. Prior year amounts
primarily represent corrections of state tax rates and results of revenue agent
reviews of the 1995 and 1996 federal income tax returns.
The Company had a net deferred tax asset of approximately $8.4 million at
December 31, 1998, resulting primarily from workers' compensation deposits,
credits and reserves. The Company has not established a valuation allowance
against this net deferred tax asset as management believes that it is more
likely than not that the tax benefits will be realized in the future based on
the historical levels of pre-tax income and expected future taxable income.
NET INCOME. Net income increased to $19.8 million in 1998 from net income
of $7.0 million in 1997, an increase of $12.8 million or 182.9%. The increase
was largely due to an 80.9% increase in revenues in 1998 from 1997..
Contributing to the increase in net income was a decrease in costs of services
as a percentage of revenue to 69.7% in 1998 from 70.6% in 1997 and a decrease in
selling, general and administrative costs as a percentage of revenues to 23.8%
of revenues in 1998 from 25.1% of revenues in 1997.
Net income increased to $7.0 million in 1997 from net income of $.7 million
in 1996, an increase of $6.3 million or 900.0%. The increase was largely due to
a 105.2% increase in revenues in 1997 from 1996.. Contributing to the increase
in net income was a decrease in selling, general and administrative costs as a
percentage of revenues to 25.1% of revenues in 1997 from 26.3% of revenues in
1996, and recognition of $1.2 million of investment interest on the Company's
workers' compensation deposits. Additionally, in 1996, the Company incurred an
extraordinary charge of $1.2 million related to the retirement of its
subordinated debt.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $13.3 million,
$11.3 million and ($7.1) million, in 1998, 1997 and 1996, respectively. The
increase in cash flows from operations in 1998 as compared to 1997 is largely
due to net income for the year, increases in non-cash expenses including
depreciation and amortization and the provision for doubtful accounts, offset by
an increase in the Company's net deferred tax asset during the year.
Additionally, the reserve for workers' compensation claims grew by $12.1
million, due mainly to the increase in revenues over 1997. Finally, income taxes
payable, net of income taxes receivable, increased by $5.7 million as a result
of the Company's increased profitability over 1997. These increases were offset
by the increase in accounts receivable of $37.1 million over 1997. The increase
in accounts receivable is a result of the Company's growth, and because of
seasonal fluctuations, accounts receivable balances are historically higher in
the fourth quarter.
The increase in cash flows from operations in 1997 as compared to 1996 is
largely due to net income for the year, increases in non-cash expenses including
depreciation and amortization and the provision for doubtful accounts, offset by
an increase in the Company's net deferred tax asset during the year.
Additionally, the reserve for workers' compensation claims grew by $8.5 million,
due mainly to the increase in revenues over 1996, and workers' compensation
deposits and credits declined by $7.2 million when the Company replaced its cash
deposits with letters of credits. Finally, income taxes payable, net of income
taxes receivable, increased by $2.1 million as a result of the Company's
increased profitability over 1996. These increases were offset by the increase
in accounts receivable of $21.3 million over 1996. The increase in accounts
receivable is a result of the Company's growth, and because of seasonal
fluctuations, accounts receivable balances are historically higher in the fourth
quarter.
The Company used net cash in investing activities of $9.2 million in 1998,
$4.9 million in 1997 and $11.0 million in 1996. The increase in cash used in
investing activities in 1998 as compared to 1997 is due primarily to the
increase in capital expenditures incurred to open 170 new dispatch offices in
1998 as compared to 116 in 1997. These expenditures include primarily store
pre-opening costs, computer systems and related equipment, and leasehold
improvements. Additionally, the Company continued to acquire additional hardware
and software to accommodate the Company's information needs during its rapid
expansion program.
The decrease in cash used in investing activities in 1997 as compared to
1996 is due primarily to the purchase and improvement of the corporate office
building in 1996 and the replacement of $1.6 million of restricted cash held by
the Company's captive insurance subsidiary with a letter of credit in 1997.
Additionally, the Company's expenditures for new dispatch office pre-opening
costs declined to $2.6 million in 1997 compared to $3.6 million in 1996.
Net cash (used in) provided by financing activities was ($.1) million,
($1.9) million and $30.4 million in 1998, 1997 and 1996, respectively. The
decrease in cash used by financing activities in 1998 as compared to 1997 is due
mainly to the increase in proceeds from the sale of stock through the Company's
employee stock option and employee stock purchase plans. Additionally, in 1998,
the Company made payments of $.6 million on the CDM capital leases and used cash
of $1.9 million to repurchase 106,116 shares of its common stock on the open
market.
The decrease in cash provided by financing activities in 1997 as compared
to 1996 is due mainly to the Company's sale of common stock for net proceeds of
$33.6 million in 1996. Additionally, in 1997, checks issued against future
deposits decreased by $1.1 million and the Company used cash of $1.4 million to
repurchase 343,884 shares of its common stock on the open market.
During 1998, the Company entered into a line-of-credit agreement with U.S.
Bank with interest at the bank's prime rate (7.75% at December 31, 1998). The
agreement allows the company to borrow up to the lesser of $40 million or 80% of
eligible accounts receivable, as defined by the bank. The line-of-credit is
secured primarily by the Company's accounts receivable and expires in June 2000.
The line-of-credit agreement requires that the Company maintain minimum net
worth and working capital amounts. The Company was in compliance with the
requirements at December 31, 1998. Subsequent to year end, the Company entered
into a new line-of-credit agreement with the bank which increases the Company's
borrowing limit to $60 million.
As discussed further in Note 2 to the consolidated financial statements,
the Company is required by the workers' compensation program to collateralize a
portion its workers' compensation liability with irrevocable letters of credit.
At December 31, 1998, the Company had provided its insurance carriers with
letters of credit totaling $12.6 million. The letters of credit bear fees of
.75% per year and are supported by an equal amount of available borrowings on
the line-of-credit. Accordingly, at December 31, 1998, no borrowings were
outstanding on the line-of-credit, $12.6 million was committed by the letters of
credit and $27.4 million was available for borrowing. Subsequent to year end,
the Company increased its outstanding letters of credit by $4.0 million.
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Historically, the Company has financed its operations through cash
generated by external financing including term loans, lines-of-credit and the
1996 common stock offering. The principal use of cash is to finance the growth
in receivables and the cost of opening new dispatch offices. The Company may
experience cash flow deficits from operations and investing activities while the
Company expands its operations, including the acceleration of opening new
dispatch offices. Management expects cash flow deficits to be financed by
profitable operations, the use of the Company's line-of-credit, and may consider
other equity or debt financings as necessary. The Company analyzes acquisition
opportunities from time to time and may pursue acquisitions in certain
circumstances. Any acquisitions the Company enters into may require additional
equity or debt financing.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates,
and to a minor extent, foreign currency exchange rates, each of which could
adversely affect the value of the Company's investments. The Company does not
currently use derivative financial instruments. At December 31, 1998, the
Company's investments have maturities when purchased of less than 90 days. As
such, an increase in interest rates immediately and uniformly by 10% from levels
at December 31, 1998 would not have a material affect upon the Company's cash
and cash equivalent balances. Because of the relative short maturities of
investments held by the Company, it does not expect its operating results or
cash flows to be affected to any significant degree by a sudden change in market
interest rates on its cash and cash equivalents portfolio.
The Company has a minor amount of assets and liabilities denominated in
certain foreign currencies related to the Company's international operations.
The Company has not hedged its translation risk on these currencies and the
Company has the ability to hold its foreign-currency denominated assets
indefinately and does not expect that a sudden or significant change in foreign
exchange rates would have a material impact on future net income or cash flows.
OUTLOOK: ISSUES AND UNCERTAINTIES
Labor Ready does not provide forecasts of future financial performance.
While Labor Ready's management is optimistic about the Company's long-term
prospects, the following issues and uncertainties, among others, should be
considered in evaluating its growth outlook.
MANAGE GROWTH. The Company's growth is dependent upon such factors as its
ability to attract and retain sufficient qualified management personnel to
manage multiple and individual dispatch offices, the availability of sufficient
temporary workers to meet customer needs, workers' compensation costs,
collection of accounts receivable and availability of working capital, all of
which are subject to uncertainties. The Company must continually adapt its
management structure and internal control systems as it continues its rapid
growth.
KEY PERSONNEL. The Company's success depends to a significant extent upon
the continued service of its Chief Executive Officer and other members of the
Company's executive management. Future performance depends on its ability to
recruit, motivate and retain key management personnel.
GOVERNMENT REGULATIONS AND WORKERS' COMPENSATION. The Company incurs
significant costs to comply with all applicable federal and state laws and
regulations relating to employment, including occupational safety and health
provisions, wage and hour requirements (including minimum wages), workers'
compensation and unemployment insurance. The Company attempts to increase fees
charged to its customers to offset increased costs relating to these laws and
regulations, but may be unable to do so. If Congress or state legislatures adopt
laws specifying benefits for temporary workers, demand for the Company's
services may be adversely affected. In addition, workers' compensation expenses
are based on the Company's actual claims experiences in each state and the
actual aggregate workers' compensation costs may exceed estimates.
QUALIFIED MANAGERS. The Company relies heavily on the performance and
productivity of its dispatch office general managers, who manage the operation
of the dispatch offices, including recruitment and daily dispatch of temporary
workers, marketing and providing quality customer service. The Company opened
170 dispatch offices in 1998 and plans to open 200 new offices in the first half
of 1999 and 200 in 2000. The Company must therefore recruit a sufficient number
of managers to staff each new office and to replace managers lost through
attrition or termination. The Company's future growth and performance depends on
its ability to hire, train and retain qualified managers from a limited pool of
qualified candidates who frequently have no prior experience in the temporary
employment industry.
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COMPETITION. The short-term, light industrial niche of the temporary
services industry is highly fragmented and highly competitive, with limited
barriers to entry. Several very large full-service and specialized temporary
labor companies, as well as small local operations, compete with the Company in
the staffing industry. Competition in some markets is intense, particularly for
provision of light industrial personnel, and price pressure from both
competitors and customers is increasing.
WORKING CAPITAL REQUIREMENTS. While the Company has generated positive cash
flows from operations in each of the two years ended December 31, 1998 and 1997,
the Company has historically experienced significant negative cash flow from
operations and investment activities resulting from the rapid growth in dispatch
offices. In 1998, the Company incurred costs of approximately $7.6 million to
open 170 new dispatch offices, an average of approximately $45,000 per dispatch
office. Once open, the Company invests significant additional cash into the
operations of new dispatch offices until they begin to generate sufficient
revenue to cover their operating costs. In addition, the Company pays its
temporary personnel on a daily basis and bills its customers on a weekly basis.
The Company expects to require additional sources of capital in order to
continue to grow especially during seasonal peaks in revenue experienced in the
third and fourth quarter of the year.
INDUSTRY RISKS. Temporary staffing companies employ people in the workplace
of their customers. Attendant risks include potential litigation based on claims
of discrimination and harassment, violations of health and safety and wage and
hour laws, criminal activity, and other claims. While the Company tries to limit
its liability by contract, it may be held responsible for the actions at a job
site of workers not under the Company's direct control. Temporary staffing
companies are also affected by fluctuations and interruptions in the business of
their customers.
ECONOMIC FLUCTUATIONS. The general level of economic activity, interest
rates and unemployment in the U.S. and specifically within the construction,
landscaping and light industrial trades may significantly affect demand for the
Company's services.
SEASONALITY. Many of the Company's customers are in the construction and
landscaping industries, which are significantly affected by seasonal factors
such as the weather. The Company generally experiences increased demand in the
spring, summer and early fall, while inclement weather is generally coupled with
lower demand for the Company's services.
AVAILABILITY OF TEMPORARY WORKERS. The Company competes with other
temporary personnel companies to meet its customer needs. The Company must
continually attract reliable temporary workers to fill positions and may from
time to time experience shortages of available temporary workers.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information
required by this item is incorporated by reference from the section titled
"Quantitative and Qualitative Disclosures About Market Risk" in Item 7A.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Form 10-K.
INFORMATION PROCESSING. The Company's management information systems,
located at its headquarters, are essential for data exchange and operational
communications with dispatch offices throughout the country. Any interruption,
impairment or loss of data integrity or malfunction of these systems could
severely hamper the Company's business.
YEAR 2000 ISSUES. As the Year 2000 approaches, there are uncertainties
concerning whether computer systems and electronic equipment with date functions
will properly recognize date-sensitive information when the year changes to
2000. Systems that do not properly recognize such information could generate
erroneous data or fail. Due to the Company's reliance on its management
information systems, failure of the management information systems for any
reason (including Year 2000 noncompliance) could result in the loss of
communications with its dispatch offices and could result in unforeseeable but
potentially material losses to the Company. However, management believes that
the Year 2000 does not pose a significant operational problem for the Company's
computer systems.
The Company has developed and is currently implementing a significant
upgrade to its proprietary management information systems to address the
dramatic growth (and expected future growth) in the number of the Company's
dispatch offices and provide certain enhanced features. The software upgrade is
Year 2000 compliant. Through December 31, 1998, the Company has incurred
approximately $1.2 million in development costs which is included in the
accompanying consolidated balance sheets in "Computers and Software". The
Company expects that the upgrade will be installed Company-wide not later than
September 30, 1999.
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Management has identified three systems with potential Year 2000 problems:
(1) the existing management information system, which is being replaced as
discussed above, (2) the communication system currently used to exchange point
of sale information between corporate headquarters and the dispatch offices and,
(3) the payroll system for corporate employees (but not for temporary employees
dispatched to customers). The Company expects to correct the Year 2000 problem
related to its system for communicating point of sale information with an
upgrade supplied by the vendor. Alternatively, the Company believes that it
could implement an alternative, Year 2000 compliant system with minimal cost.
The Company expects to upgrade the payroll system by year-end, but will use, if
necessary, a third party capable of providing payroll services. The Company has
not negotiated the cost of such services but believes there are alternative
providers to assure that any costs incurred are at competitive rates.
The Company has tested and will continue to test other computer components
and software including its non-information processing systems such as its data
and phone communications systems for Year 2000 compliance. Based on such
testing, the Company expects to replace its voice mail system for a total cost
of approximately $75,000. Testing has indicated no other year 2000 compliance
problems. If other systems fail, the Company will be required to replace them.
Replacement systems are mass produced and available from a large number of
vendors and would constitute an immaterial expense relative to the operating
budget of the Company.
Management believes that as a result of the nature of the Company's
business the Company bears little exposure to risk of Year 2000 non-compliance
by third parties. The Company acquires supplies (e.g., personal safety
equipment, office supplies) that are mass-produced and readily available from a
large number of suppliers. None of the Company's customers represent more than
2% of the Company's revenues, so that, unless a significant number of the
Company's customers experience complete disruptions to their business, the
Company is unlikely to experience significant loss of revenue. Nevertheless, the
Company is currently conducting a survey of its largest vendors and customers in
order to assess the readiness of these third parties with which it deals. If the
Company determines that any of its vendors are unable to adequately address Year
2000 issues, the Company believes that alternatives could be found before the
Year 2000.
The Company believes that its systems will be Year 2000 compliant by year
end, if not before, and that the Year 2000 issue will not materially impact the
Company. The forward looking statements referenced above, including the
preceding sentence, are subject to a number of risks and uncertainties,
including the ability of customers, vendors and other third parties to solve
timely their Year 2000 issues, the accuracy of Year 2000 testing methods and
that remediation of Year 2000 issues will be correctly implemented. The Company
does not have a contingency plan to address unexpected Year 2000 issues; however
the Company has taken steps to develop a contingency plan for certain Year 2000
issues and anticipates completion by April 30, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required hereunder are
included in the Annual Report as set forth in Item 14 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
TENURE OF DIRECTORS AND OFFICERS
The names, ages and positions of the directors, executive officers and
certain key employees of the Company as of March 15, 1999 are listed below along
with their business experience during the past five years. No family
relationships exist among any of the directors or executive officers of the
Company, except that Todd A. Welstad is the son of Glenn A. Welstad.
NAME AGE POSITION
---- --- --------
Glenn A. Welstad . . . . . . . . . . . . . . . . . . . 55 Chairman of the Board, Chief Executive Officer and
President
Ronald L. Junck . . . . . . . . . . . . . . . . . . . . 51 Director, Executive Vice President, General Counsel and
Secretary
Richard W. Gasten . . . . . . . . . . . . . . . . . . . 61 Director and Vice President and Secretary of Labour
Ready Temporary Services, Ltd.
Thomas E. McChesney . . . . . . . . . . . . . . . . . . 52 Director
Robert J. Sullivan . . . . . . . . . . . . . . . . . . 68 Director
Joseph P. Sambataro, Jr.. . . . . . . . . . . . . . . . 48 Executive Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
Dennis Diamond . . . . . . . . . . . . . . . . . . . . 38 Chief Operating Officer
Robert H. Sovern . . . . . . . . . . . . . . . . . . . 50 Assistant Treasurer
Robert F. Groen . . . . . . . . . . . . . . . . . . . 48 Director of Risk Management
Todd A. Welstad . . . . . . . . . . . . . . . . . . . . 29 Chief Information Officer
Joseph L. Havlin . . . . . . . . . . . . . . . . . . . 44 Corporate Controller
BUSINESS EXPERIENCE
The business experience and brief resumes on each of the Directors,
Executive Officers, and significant employees are as follows:
GLENN A. WELSTAD has served as the Company's Chairman of the Board of
Directors, Chief Executive Officer and President since February 1988. Prior to
joining the Company, Mr. Welstad was an officer of Body Toning, Inc., W.I.T.
Enterprises, and Money Mailer from February 1987 to March 1989. In 1969 Mr.
Welstad founded Northwest Management Corporation, a holding company for
restaurant operations. Over the course of 15 years, Mr. Welstad expanded the
operations to twenty-two locations in five states, which included eight Hardee's
Hamburger Restaurants as well as pizza and Mexican restaurants. In March 1984,
Mr. Welstad sold his ownership interest in Northwest Management Corporation.
RONALD L. JUNCK has served as a Director and Secretary of the Company since
November 1995. In February 1998, Mr. Junck joined the Company as Executive Vice
President and General Counsel. From 1974 until 1998, Mr. Junck practiced law in
Phoenix, Arizona, specializing in business law and commercial transactions and
serving as the Company's outside counsel. As an attorney, he has extensive trial
experience in a variety of commercial cases and has lectured widely at a number
of colleges and universities.
RICHARD W. GASTEN has served as a Director of the Company since August
1996. Mr. Gasten has also served as a Director of Labour Ready Temporary
Services, Ltd., the Company's Canadian subsidiary and as a consultant to the
Company since September 1995. In June 1997, Mr. Gasten was appointed to the
position of Vice President and Secretary of Labour Ready. With this appointment,
the consulting agreement with Mr. Gasten terminated. Mr. Gasten has over 25
years experience as a member of executive management with Western Capital Trust
Company, Vancouver, B.C., Unity Bank of Canada and The Bank of Nova Scotia.
THOMAS E. MCCHESNEY has served as a director of the Company since July
1995. In September 1996, Mr. McChesney became associated with Blackwell
Donaldson and Company, as director of investment banking. Mr. McChesney is also
a director of Firstlink Communications, Inc. and Nations Express, Inc.
Previously, Mr. McChesney was an officer and director of Paulson Investment Co.
and Paulson Capital Corporation from March 1977 to June 1995.
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ROBERT J. SULLIVAN has served as a director of the Company since November
1994. Prior to joining the Company he served as a financial consultant of the
Company from July 1993 to June 1994. Mr. Sullivan served as Chief Financial
Officer of Unifast Industries, Inc. from June 1990 to November 1991, and General
Manager of Reserve Supply Company of Long Island from July 1992 to December
1993. Additionally, Mr. Sullivan has an extensive career of over 33 years in
financial management, as both a CPA and audit manager with Price Waterhouse &
Co. and as a member of executive management with companies listed on NYSE and
AMEX such as American Express Company, Bush Universal, Inc., Cablevision
Systems, Inc. and Micron Products, Inc.
JOSEPH P. SAMBATARO, JR. has served as Executive Vice President, Treasurer,
Chief Financial Officer and Assistant Secretary of the Company since August
1997. Prior to joining the Company, he served as the Managing Partner of the
Seattle office of BDO Seidman, LLP, an accounting and consulting firm from 1990
to 1997. In 1985 Mr. Sambataro was co-founder, and served as Director and
Officer of Ecova Corporation, an on-site toxic waste remediation company until
1989. From 1972 until 1985 Mr. Sambataro was a Partner with KPMG Peat Marwick in
the New York, Miami and Seattle offices. Mr. Sambataro obtained a degree in
accounting from Fordham University in 1972 and is a member of the American
Institute of Certified Public Accountants.
DENNIS DIAMOND has served as Chief Operating Officer since June 1998. Since
joining the Company in 1993, Mr. Diamond has served in a variety of positions of
increasing responsibility, most recently, as Executive Vice President of
Operations since March 1998 and Vice President of Operations for the Western
Division since October 1997. Mr. Diamond started with Labor Ready in 1993 as a
dispatch office general manager and has served as a District Manager and Area
Director in various locations with the Company. Mr. Diamond received his Masters
of Business Administration from Kansas State University in 1991 and his
Bachelor's Degree in Political Science from Clemson University in 1982.
ROBERT H. SOVERN has served as Assistant Treasurer of the Company since
June 1996. Mr. Sovern joined the Company in March 1996 as Director of Accounts
Receivable, Credit and Collection. Prior to joining the Company he was an
entrepreneur operating Hallmark gift shops. Mr. Sovern was President and Chief
Executive Officer of Heritage Savings and Loan Association, Olympia, Washington
from December 1984 to July 1989 and served as an executive with Great Northwest
Federal Savings, Bremerton and Poulsbo, Washington from July 1977 to December
1984. Mr. Sovern also served as a banking officer for three years with Federal
Home Loan Bank and University Federal Savings.
ROBERT F. GROEN has served the Company as Director of Risk Management since
March 1998. From March 1989 to August 1997, Mr. Groen was employed by Humana,
Inc. as Director of Corporate Insurance and Risk Management. Mr. Groen also
served as Chief Operating Officer of Illinois Providence Trust and Illinois
Compensation Trust from October 1980 to March 1989.
TODD A. WELSTAD has served as Chief Information Officer of the Company
since August 1997. Mr. Welstad joined the Company in January 1994 as the manager
of the Tacoma dispatch office and in August 1994 was promoted to Systems Analyst
in the MIS Department. From October 1994 until August 1997, Mr. Welstad served
as Director of the MIS Department. From February 1989 to December 1994, Mr.
Welstad was employed as a Technical Supervisor at Micro-Rel, a division of
Medtronics.
JOSEPH L. HAVLIN has served as Corporate Controller of the Company since
September 1997. Prior to joining the Company he served as Chief Financial
Officer for West 175 Enterprises, Inc. from July 1996 to September 1997 and as
Audit Partner in the Seattle office of BDO Seidman, LLP from October 1993 to
July 1996. Mr. Havlin served as Chief Financial Officer of the United States
operations of a large Chinese trading company from 1989 to 1991 and from 1984 to
1989 he served as audit manager in the Seattle office of Arthur Young & Co. Mr.
Havlin obtained a degree in accounting from Western Washington University in
1984 and is a member of the American Institute of Certified Public Accountants.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, as amended,
requires the Company's officers and directors and certain other persons to file
timely certain reports regarding ownership of, and transactions in, the
Company's securities with the Securities and Exchange Commission. Copies of the
required filings must also be furnished to the Company. Based solely on its
review of such forms received by it or representations from certain reporting
persons, the Company believes that during 1998 all applicable Section 16(a)
filing requirements were met, except that a Form 4 was not filed timely with
respect to Ralph E. Peterson's exercise on November 5, 1998 of an option to
acquire 50,253 shares of the Company's common stock. This event was reported on
a Form 5 dated February 12, 1999.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Chief
Executive Officer and the next four most highly compensated executive officers
of the Company.
SUMMARY COMPENSATION TABLE (1)
--------------------------- ---------------------- ----------------------
LONG -TERM ALL OTHER
ANNUAL COMPENSATION COMPENSATION AWARDS COMPENSATION
--------------------------- ---------------------- ----------------------
Securities
Underlying Options/ Matching 401(k)
Name and Position Year Salary ($) SARs(#) Contributions
- ---------------------------------------- ----------- ------------- ----------------------- ----------------------
Glenn A. Welstad 1998 497,380 30,000 $2,500
Chairman of the Board, Chief 1997 452,958 - $2,375
Executive Officer and President 1996 401,486 -
Ralph E. Peterson (2) 1998 240,000 30,000 -
Executive Vice President - Corporate 1997 265,026 1,125 -
And Business Development 1996 154,772 506,250 -
Dennis D. Diamond 1998 198,692 30,000 $2,484
Chief Operating Officer 1997 172,917 79,875 $2,195
1996 170,233 -
Joseph P. Sambataro, Jr. 1998 192,692 30,000 $1,731
Executive Vice President Chief 1997 53,328 270,000 -
Financial Officer, Treasurer and
Assistant Secretary
Thomas E. Gilbert 1998 168,000 6,369 $2,500
Vice President - Western Region 1997 153,577 23,625 $1,487
1996 86,263 13,500 -
- ---------------------------------------- ----------- ------------- ----------------------- ----------------------
(1) None of the named executives received compensation reportable under the
Restricted Stock Awards or Long-Term Incentive Plan Payouts columns.
(2) Effective December 31, 1998, Mr. Peterson resigned as Executive Vice
President Corporate and Business Development and effective March 12,
1999, he resigned as Director.
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OPTION GRANTS DURING 1998 FISCAL YEAR
The following table provides information related to options granted to the
named executive officers during 1998.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (1)
- ------------------------------------------------------------------------------------------ -----------------------
Number of % of total
Securities Options/SARS Exercise
Underlying Granted to or Base
Options/SARS Employees in Price Expiration
Name Granted (2) Fiscal Year ($/Sh)(3) Date 5% 10%
- ------------------------------------ --------------- -------------- ---------- ----------- ------------ ----------
Glenn Welstad
Chairman of the Board, Chief 30,000 2% 18.08 2/27/03 149,910 331,110
Executive Officer and President
- ------------------------------------ --------------- -------------- ---------- ----------- ------------ ----------
Ralph E. Peterson
Executive Vice President- Corporate 30,000 2% 18.08 2/27/03 149,910 331,110
and Business Development
- ------------------------------------ --------------- -------------- ---------- ----------- ------------ ----------
Dennis D. Diamond
Chief Operating Officer 30,000 2% 18.08 2/27/03 149,910 331,110
- ------------------------------------ --------------- -------------- ---------- ----------- ------------ ----------
Joseph P. Sambataro, Jr.
Executive Vice President, Chief 30,000 2% 18.08 2/27/03 149,910 331,110
Financial Officer, Treasurer and
Assistant Secretary
- ------------------------------------ --------------- -------------- ---------- ----------- ------------ ----------
Thomas E. Gilbert
Vice President - Western Region 6,369 .3% 18.08 2/27/03 31,826 70,295
- ------------------------------------ --------------- -------------- ---------- ----------- ------------ ----------
(1) The potential realizable value portion of the table illustrates value
that might be realized upon exercise of the options immediately prior
to the expiration of their term, assuming the specified compounded
rates of appreciation on the Company's Common Stock over the term of
the options. These numbers do not take into account certain provisions
of the options providing for cancellation of the option following
termination of employment.
(2) Options to acquire shares of Common Stock. The options vest 25%
annually over the next four years.
(3) The option exercise price may be paid in shares of Common Stock owned
by the executive officer, in cash, or in any other form of valid
consideration or a combination of any of the foregoing, as determined
by the Compensation Committee in its discretion.
- --------------------------------------------------------------------------------
Page-24
- --------------------------------------------------------------------------------
OPTION EXERCISES DURING 1998 AND YEAR END OPTION VALUES
The following table provides information related to options exercised by
the named executive officers during 1998 and the number and value of options
held at year-end. The Company does not have any outstanding stock appreciation
rights ("SARs").
AGGREGATE OPTION/SAR EXERCISES IN 1998 AND
YEAR END OPTION/SAR VALUE
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
DECEMBER 31, 1998 (#) DECEMBER 31, 1998 ($) (1)
-------------------------------- ---------------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- -------------- ------------ ------------ -- --------------- ------------- -------------
Glenn Welstad
Chairman of the Board,
Chief Executive Officer
And President -- -- -- 30,000 -- $48,135
- ----------------------------- -- -------------- -- ------------ -- ------------ -- --------------- -- ------------- -- -------------
Ralph E. Peterson
Executive Vice President
Corporate and Business
Development 50,835 $1,980,236 152,529 233,343 $2,096,569 $3,007,170
- ----------------------------- -- -------------- -- ------------ -- ------------ -- --------------- -- ------------- -- -------------
Dennis D. Diamond
Chief Operating Officer
-- -- 34,706 85,632 $490,651 $714,963
- ----------------------------- -- -------------- -- ------------ -- ------------ -- --------------- -- ------------- -- -------------
Joseph P. Sambataro, Jr.
Executive Vice President
Chief Financial Officer
Treasurer and Assistant
Secretary -- $1,000,552 75,000 165,000 $1,059,938 $1,956,023
- ----------------------------- -- -------------- -- ------------ -- ------------ -- --------------- -- ------------- -- -------------
Thomas E. Gilbert
Vice President - Western
Region 9,281 -- -- 25,213 -- $276,508
(1) The closing price for the Company's common stock as reported by the
New York Stock Exchange on December 31, 1998, was $19.69.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's executive compensation is determined by a compensation
committee comprised of two members of the Board of Directors, Messrs. McChesney
and Sullivan. The philosophy of the Company's executive compensation program is
that compensation of executive officers should be directly and materially linked
both to the operating performance of the Company and to the interests of
Shareholders.
Annual cash compensation, together with stock options, is designed to
attract and retain qualified executives and to ensure that such executives have
a continuing stake in the long term success of the Company. Beginning in 1998,
the Compensation Committee developed more formal policies with respect to
executive compensation through the use of a consulting firm. In 1998, the Board
of Directors approved guidelines for annual grants of stock options to
management and administrative personnel. Under the plan as approved, each of the
executive officers of the Company receives a grant of 20,000 options per year,
subject to annual approval by the Compensation Committee.
With respect to compensation for the Company's CEO, base salary for 1998
and prior years has been set by a contract that expired December 31, 1998. The
Company has reached an agreement, and expects to finalize a new contract as
described below, with Mr. Welstad early in 1999. With respect to both base
salary and incentive compensation, the Compensation Committee believes that
there is substantial basis for increasing the CEO's compensation. The Company's
common stock price has increased dramatically in the past four and a half years
(more than 1,400%), many times the Company's peer group and the Nasdaq
Composite. In addition, revenue growth during the last year and last five years
increased 81% and 1,458%, respectively, while earnings have increased in the
same periods 183% and 2,224%, respectively.
- --------------------------------------------------------------------------------
Page-25
- --------------------------------------------------------------------------------
The Compensation Committee believes that, as the Company's single largest
shareholder, the CEO's interests are already aligned with the interests of all
shareholders. However, based on the Company's outstanding performance for the
last year and the prior five years, the Committee believes that there is a
significant basis for increasing the CEO's compensation. The Committee would
view favorably increasing the CEO's cash compensation through salary adjustments
or bonuses or granting additional stock-based compensation, or both. Instead,
the CEO has requested, and the Committee has given preliminary approval, to (1)
entering into a split dollar insurance policy with a trust for his estate
planning purposes; and (2) increasing his salary the same as in past years, by
10%.
With respect to other executive officers, the Compensation Committee sets
salary based on recommendations of the CEO, unless the officer's salary is
established by written contract. With respect to officers that have recently
joined the Company, the recommendations are based on the CEO's negotiations with
the officer as necessary to attract such persons to become officers of the
Company. With respect to other officers, especially the CEO's son, the
Compensation Committee reviews the salaries for officers with comparable duties
at the median of companies of comparable revenue size in the Pacific Northwest.
These companies are selected informally without the use of a compensation
consultant. Annual salary increases are typically modest, except to reflect
changes in responsibilities.
In 1997, the Company began developing a cash incentive bonus plan for
management employees. The draft plans were rejected and, in early 1998, the
Company engaged a consultant to assist it in developing a plan for incentive
cash compensation. At this time, both the Company's CEO and the Compensation
Committee believe that stock option grants provide an adequate incentive for
management employees. As a result, the Compensation Committee does not at this
time anticipate adopting an incentive cash compensation plan. The Compensation
Committee intends to review periodically the need for and benefits of such a
plan.
Members of the Compensation Committee
Thomas E. McChesney, Chair
Robert J. Sullivan
EMPLOYMENT AGREEMENTS:
On October 31, 1995, the Company entered into an employment agreement with
Glenn Welstad, the Company's Chairman and Chief Executive Officer, which
provides for annual compensation of $31,250 per month at inception of the
agreement, subject to annual increases on the anniversary date of the agreement
of 10% of the prior period's base salary. In addition, the employment agreement
provides for a bonus, as determined by the compensation committee, based on Mr.
Welstad's performance, and the overall performance of the Company. The term of
Mr. Welstad's employment agreement runs from October 31, 1995 through December
31, 1998. The Company has reached an agreement with Mr. Welstad for the renewal
of his employment agreement through December 31, 2003. Under terms of the
agreement, Mr Welstad will receive his current salary, with scheduled annual
increases of 10%, 20,000 stock options annually as provided by the Company's
Employee Stock Option and Incentive Plan and an Executive Split Dollar Plan
("the Plan"). Under terms of the Plan, a family trust established by Mr. Welstad
will purchase a $15 million life insurance policy on the life of Mr. Welstad and
his spouse. The Company will advance annual premiums of approximately $167,000
and will receive repayment of these premium advances upon surrender of the
policy, the death of the insured or at the end of the tenth policy year.
In March 1997, the Company entered into an employment agreement with Ralph
E. Peterson, the Company's Executive Vice President - Corporate and Business
Development, which provides for annual compensation of $20,000 per month at
inception of the agreement, subject to annual increases on the anniversary date
of the agreement at the discretion of the Board of Directors. In addition, the
employment agreement provides for a bonus, as determined by the compensation
committee, based on Mr. Peterson's performance, and the overall performance of
the Company. The agreement provides Mr. Peterson with options to purchase
337,500 of the Company's common stock at its fair market value at date of grant
of $5.95. 67,500 of the options vest on the date of grant and the balance in
equal annual amounts to 2000. The agreement expires in 2000 unless extended by
mutual agreement between Mr. Peterson and the Board of Directors or is
terminated pursuant to its terms. Effective December 31, 1998, Mr. Peterson and
the Company agreed to terminate his employment agreement and Mr. Peterson
resigned his duties as Executive Vice President Corporate and Business
Development. Effective March 12, 1999, Mr. Peterson resigned as Director. The
Company has entered into an employment agreement with Mr. Peterson through April
30, 2002 which provides for a salary of $2,000 per month and continuation of the
vesting schedule for options which had been previously granted. Mr. Peterson
will continue to assist the company with business development and other special
projects as directed by its President and CEO.
- --------------------------------------------------------------------------------
Page-26
- --------------------------------------------------------------------------------
In August 1997, the Company entered into an employment agreement with
Joseph P. Sambataro, Jr., the Company's Executive Vice President, Chief
Financial Officer, Treasurer and Assistant Secretary, which provides for annual
compensation of $13,500 per month, subject to annual increases on the
anniversary date of the agreement at the discretion of the Board of Directors.
In addition, the employment agreement provides for a bonus, as determined by the
compensation committee, based on Mr. Sambataro's performance, and the overall
performance of the Company. The agreement provides Mr. Sambataro with options to
purchase 270,000 of the Company's common stock at its fair market value at date
of grant of $5.55. 67,500 of the options vest on the date of grant and 33,750
options vest semi-annually to 2000. The agreement expires in 2001 unless
extended by mutual agreement between Mr. Sambataro and the Board of Directors or
is terminated pursuant to its terms.
ITEM 12. PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of each class of equity securities of the Company as of December 31,
1998 for (i) each person known to the Company to own beneficially 5% or more of
any such class as of December 31, 1998, (ii) each director of the Company, (iii)
each executive officer of the Company required to be identified as a Named
Executive Officer pursuant to Item 402 of Regulation S-K and (iv) all officers
and directors of the Company as a group. Except as otherwise noted, the named
beneficial owner has sole voting and investment power. See "Management" for a
description of each individual's position with the Company, if any.
AMOUNT AND
NATURE OF
BENEFICIAL
OWNERSHIP
NAME & ADDRESS (NUMBER OF PERCENT
OF BENEFICIAL OWNER TITLE OF CLASS SHARES)(1) OF CLASS
- ------------------- -------------- ---------- --------
Glenn A. Welstad (1) (2). . . . . . . . Common Stock 3,509,888 12.4%
Preferred Stock 3,209,826 74.2%
Ralph E. Peterson (1) . . . . . . . . . Common Stock 263,101 *
Joseph P. Sambataro, Jr (1). . . . . . . Common Stock 116,250 *
Dennis Diamond (1) . . . . . . . . . . . Common Stock 47,269 *
Ronald L. Junck (1). . . . . . . . . . Common Stock 224,801 *
Richard W. Gasten (1) . . . . . . . . . Common Stock 21,675 *
Thomas E. McChesney (1). . . . . . . . . Common Stock 89,959 *
Robert J. Sullivan (1) . . . . . . . . Common Stock 65,737 *
All Officers and Directors as. . . . . . Common Stock 4,349,618 15.4%
Group (11 Individuals) (1) . . . . . . Preferred Stock 3,209,826 74.2%
* Less than 1%.
(1) Beneficial ownership is calculated in accordance with Rule 13d-3(d)(1) of
the Securities Exchange Act of 1934, as amended and includes shares of
Common Stock issuable upon exercise of options, warrants, and other
securities convertible into or exchangeable for Common Stock currently
exercisable or exercisable within 60 days of December 31, 1998.
(2) The business address of Mr. Welstad is 1016 S. 28th Street, Tacoma,
Washington, 98409.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Junck is an employee of the Company, a member of its board of
directors, and is also a shareholder in a law firm that received approximately
$429,000, $587,000 and $337,000 in payment for legal services performed for the
Company in 1998, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
Page-27
- --------------------------------------------------------------------------------
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The Financial Statements are found on pages F-1 through F-21 of this
Form 10-K. The Financial Statement Table of Contents is on Page F-1. The Exhibit
Index is found on Page 29 and 30 of this Form 10-K.
The Company filed a Current Report on Form 8-K on November 5, 1998
which reported under Item 5 "Other Events" that 1) the Company commenced trading
on the NYSE on October 27, 1998, 2) American Stock Transfer and Trust had been
appointed as the Company's transfer agent, and 3) the number of Preferred Shares
purchasable upon exercise of a Purchase Right had been adjusted 6.7/1000 of a
Preferred Share.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LABOR READY, INC.
/s/ Glenn A. Welstad 3/30/99
--------------------------------------------
Signature Date
By: Glenn A. Welstad, Chairman of the Board,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Glenn A. Welstad 3/30/99
Signature Date
- ----------------------------------------------------------
Glenn A. Welstad, Chairman of the Board, Chief Executive
Officer and President
/s/ Joseph P. Sambataro, Jr. 3/30/99
- ----------------------------------------------------------
Signature Date
Joseph P. Sambataro, Jr., Executive Vice President, Chief
Financial Officer, Treasurer and Assistant Secretary
/s/ Ronald L. Junck 3/30/99
- ----------------------------------------------------------
Signature Date
Ronald L. Junck, Executive Vice President, Secretary,
General Counsel and Director
/s/ Robert J. Sullivan 3/30/99
- ----------------------------------------------------------
Signature Date
Robert J. Sullivan, Director
/S/ Richard W. Gasten 3/30/99
- ----------------------------------------------------------
Signature Date
Richard W. Gasten, Vice President and Secretary, Labour
Ready Temporary Services, Ltd. and Director
/s/ Thomas E. Mcchesney 3/30/99
- ----------------------------------------------------------
Signature Date
Thomas E. McChesney, Director
- --------------------------------------------------------------------------------
Page-28
- --------------------------------------------------------------------------------
EXHIBIT INDEX
FORM 10-K
LABOR READY, INC.
Exhibit Number Description
- -------------- -----------
3 Articles of Incorporation (1)
3.1 Articles of Amendment to Articles of Incorporation (1)
3.2 Bylaws (1)
4 Instruments Defining Rights of Security Holders (1)
4.1 Rights Agreement Dated January 6, 1998 (2)
10 Material Contracts
10.1 Warrant Purchase Agreements (1)
10.2 Executive Employment Agreement between Labor Ready, Inc. And Glenn A.
Welstad (1)
10.3 Employment Agreement between Labor Ready, Inc. and Joseph P. Sambataro,
Jr. dated August 1, 1997
10.4 Business Loan Agreement between Labor Ready, Inc. and U.S. Bank of
Washington, N.A., dated February 3, 1999
10.5 Form of Lease for Labor Ready, Inc. dispatch office (1)
10.6 1996 Employee Stock Option and Incentive Plan (1)
10.7 1996 Employee Stock Purchase Plan (1)
10.8 Employment Agreement between Labor Ready, Inc. and Ralph E. Peterson
dated February 10, 1999
10.9 Form of equipment lease and related schedules at various dates between
the Company as lessor, T&W Financial Corporation as Lessee and Diebold
Corporation as Vendor
10.10 Business Loan Agreement between Labor Ready, Inc. and U.S. Bank of
Washington N.A., dated June 18, 1998
10.11 Excess Bond to Secure Premium and Deductible Obligations between Labor
Ready, Inc., Travelers Casualty and Surety Company of America, Mutual
Indemnity (U.S.) Ltd., and Legion Insurance Company dated September 1,
1998
10.12 Employment Agreement between Labor Ready, Inc. and Ronald L. Junck
dated March 20, 1998
10.13 Bond to Secure Premium and Deductible Obligations between Labor Ready,
Inc. Travelers Casualty and Surety Company of America, Reliance
National Indemnity Company dated February 16, 1999
- --------------------------------------------------------------------------------
Page-29
- --------------------------------------------------------------------------------
EXHIBIT INDEX (CONTINUED)
Exhibit Number Description
- -------------- -----------
16 Letter re change in certifying accountant (3)
21 Subsidiaries of Labor Ready, Inc.
23 Consents of Independent Certified Public Accountants
23.1 Consent of Arthur Andersen LLP - Independent Public Accountants
23.2 Consent of BDO Seidman, LLP - Independent Certified Public Accountants
27 Financial Data Schedules
27.1 December 31, 1998 and for the year then ended
27.2 December 31, 1996 and 1997, for each of the two
years in the period ended December 31, 1997
27.3 March 31, 1998 and for the three month period then ended
(1) Incorporated by reference to the Company's Form 10 Registration Statement,
SEC File No. 0-2382.
(2) Incorporated by reference to the Company's Current Report on Form 8-K Filed
on January 16, 1998.
(3) Incorporated by reference to the Company's Current Report on Form 8-K filed
on September 26, 1997.
COPIES OF EXHIBITS MAY BE OBTAINED UPON REQUEST DIRECTED TO MR. JOSEPH P.
SAMBATARO, JR., LABOR READY, INC., 1016 S. 28TH STREET, TACOMA, WASHINGTON,
98409.
- --------------------------------------------------------------------------------
Page-30
- --------------------------------------------------------------------------------
LABOR READY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
Reports of Independent Certified Public Accountants ................................ F-2
Consolidated Balance Sheets
December 31, 1998 and 1997 ....................................................... F-4
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996 ..................................... F-6
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1998, 1997 and 1996 ..................................... F-7
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996 ..................................... F-8
Notes to Consolidated Financial Statements ......................................... F-10
- --------------------------------------------------------------------------------
F-1
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Labor Ready, Inc.
We have audited the accompanying consolidated balance sheets of Labor Ready,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements of Labor
Ready, Inc. for the year ended December 31, 1996, were audited by other auditors
whose report dated February 24, 1997, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Labor Ready, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Seattle, Washington /s/ Arthur Andersen LLP
February 12, 1999
- --------------------------------------------------------------------------------
F-2
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Labor Ready, Inc.
We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of Labor Ready, Inc. and subsidiaries for
the year ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Labor Ready, Inc. and subsidiaries for the year ended December 31,
1996 in conformity with generally accepted accounting principles.
Spokane, Washington /s/ BDO Seidman, LLP
February 24, 1997
- --------------------------------------------------------------------------------
F-3
- --------------------------------------------------------------------------------
LABOR READY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
ASSETS
1998 1997
---------------------- ------------------
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . $25,940 $22,117
Accounts receivable, less allowance for doubtful accounts
of $4,218 and $2,851. . . . . . . . . . . . . . . . . . . 65,484 36,614
Workers' compensation deposits and credits. . . . . . . . . 2,961 1,082
Prepaid expenses and other . . . . . . . . . . . . . . . . 4,947 2,660
Deferred income taxes. . . . . . . . . . . . . . . . . . . 6,601 3,144
-------------------- -----------------
Total current assets . . . . . . . . . . . . . . . . . . . 105,933 65,617
-------------------- -----------------
PROPERTY AND EQUIPMENT:
Buildings and land. . . . . . . . . . . . . . . . . . . . . 4,854 4,448
Computers and software . . . . . . . . . . . . . . . . . 13,443 8,220
Cash dispensing equipment. . . . . . . . . . . . . . . . . 7,376 --
Furniture and equipment . . . . . . . . . . . . . . . . . 667 497
-------------------- -----------------
26,340 13,165
Less accumulated depreciation . . . . . . . . . . . . . . . 6,069 2,839
-------------------- -----------------
Property and equipment, net . . . . . . . . . . . . . . 20,271 10,326
-------------------- -----------------
OTHER ASSETS:
Intangible assets and other, less accumulated amortization
of $6,383 and $3,569. . . . . . . . . . . . . . . . . . . 2,630 3,076
Deferred income taxes. . . . . . . . . . . . . . . . . . . 1,751 1,212
Restricted cash in captive insurance subsidiary. . . . . . 151 136
-------------------- -----------------
Total other assets . . . . . . . . . . . . . . . . . . . . 4,532 4,424
-------------------- -----------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . $130,736 $80,367
-------------------- -----------------
-------------------- -----------------
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-4
- --------------------------------------------------------------------------------
LABOR READY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1997
------------------ ----------------
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . $ 6,889 $ 3,711
Accrued wages and benefits . . . . . . . . . . . . . . . . . . . 7,544 4,080
Workers' compensation claims reserve, current portion . . . . . . 15,300 7,109
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . 4,355 875
Current maturities of long-term debt. . . . . . . . . . . . . . . 754 13
----------------- ----------------
Total current liabilities . . . . . . . . . . . . . . . . . . . 34,842 15,788
----------------- ----------------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities . . . . . . . . . . . . . 5,073 76
Workers' compensation claims reserve, less current portion . . . 10,324 6,462
----------------- ----------------
Total long-term liabilities . . . . . . . . . . . . . . . . . . 15,397 6,538
----------------- ----------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 50,239 22,326
----------------- ----------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $0.197 par value, 20,000 shares authorized;
4,324 shares issued and outstanding . . . . . . . . . . . . . . 854 854
Common stock, no par value, 100,000 shares authorized;
27,974 and 27,662 shares issued and outstanding . . . . . . . . . 54,131 49,694
Cumulative foreign currency translation adjustment . . . . . . . (159) 86
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 25,671 7,407
----------------- ----------------
Total shareholders' equity . . . . . . . . . . . . . . . . . . 80,497 58,041
----------------- ----------------
Total liabilities and shareholders' equity. . . . . . . . . . . $130,736 $80,367
----------------- ----------------
----------------- ----------------
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-5
- --------------------------------------------------------------------------------
LABOR READY, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
1998 1997 1996
----------------------- ------------------ ---------------------
Revenues from services . . . . . . . . . $606,895 $335,409 $163,450
Cost of services . . . . . . . . . . 422,924 236,666 115,532
--------------------- ------------------- --------------------
Gross profit. . . . . . . . . . . . . . 183,971 98,743 47,918
Selling, general and
administrative expense . . . . . . . 144,249 84,081 42,955
Depreciation and amortization. . . . . 6,076 4,011 1,797
--------------------- ------------------- --------------------
Income from operations. . . . . . . . . 33,646 10,651 3,166
Interest (income) expense
and other, net . . . . . . . . . . . 256 (1,871) (340)
--------------------- ------------------- --------------------
Income before taxes on income
and extraordinary item . . . . . . . . 33,390 12,522 3,506
Taxes on income . . . . . . . . . . . 13,591 5,559 1,585
--------------------- ------------------- --------------------
Income before extraordinary
item . . . . . . . . . . . . . . . . 19,799 6,963 1,921
Extraordinary item, net of income
tax benefit of $703 . . . . . . . . . -- -- (1,197)
--------------------- ------------------- --------------------
Net income . . . . . . . . . . . . . . $19,799 $6,963 $ 724
--------------------- ------------------- --------------------
--------------------- ------------------- --------------------
Basic income per common share:
Income before extraordinary item . . . $0.71 $0.25 $0.08
Extraordinary item, net. . . . . . . . -- -- (0.05)
--------------------- ------------------- --------------------
Net income . . . . . . . . . . . . . $0.71 $0.25 $0.03
--------------------- ------------------- --------------------
--------------------- ------------------- --------------------
Diluted income per common share:
Income before extraordinary item . . . $0.69 $0.25 $0.08
Extraordinary item, net. . . . . . . . -- -- (0.05)
--------------------- ------------------- --------------------
Net income . . . . . . . . . . . . . $0.69 $0.25 $0.03
--------------------- ------------------- --------------------
Weighted average shares
outstanding:
Basic . . . . . . . . . . . . . . . . 27,796 27,669 23,798
--------------------- ------------------- --------------------
--------------------- ------------------- --------------------
Diluted . . . . . . . . . . . . . . . 28,666 28,167 24,433
--------------------- ------------------- --------------------
--------------------- ------------------- --------------------
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-6
- --------------------------------------------------------------------------------
LABOR READY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
CUMULATIVE
RETAINED FOREIGN
COMMON STOCK PREFERRED STOCK EARNINGS CURRENCY
------------------------------- ------------------------- (ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT DEFICIT) ADJUSTMENT
------------- -------------- ---------- ----------- -------------- -----------
BALANCE, January 1, 1996 . . . . . . . 19,842 $ 7,117 4,324 $854 $590 $ (29)
Net income for the year . . . . . . -- -- -- -- 724 --
Common stock issued for 401(k)Plan. 12 48 -- -- -- --
Common stock issued from public
stock offering . . . . . . . . . 5,046 33,586 -- -- -- --
Common stock issued on debt
extinguishment and warrants
exercised . . . . . . . . . . . 2,303 7,961 -- -- -- --
Common stock issued on the exercise
of options . . . . . . . . . . . 638 805 -- -- -- --
Preferred stock dividend . . . . . -- -- -- -- (43) --
Foreign currency translation . . . -- -- -- -- -- (21)
----------- ------------- ---------- ------------ ------------- ------------
BALANCE, January 1, 1997 . . . . . . . 27,841 49,517 4,324 854 1,271 (50)
Net income for the year . . . . . . -- -- -- -- 6,963 --
Common stock repurchased . . . . . (344) (611) -- -- (784) --
Common stock issued for 401(k)Plan. 13 81 -- -- -- --
Common stock acquired through
Employee Stock Purchase Plan . . 79 375 -- -- -- --
Common stock issued on the
exercise of warrants . . . . . . 32 111 -- -- -- --
Common stock issued on the exercise
of options . . . . . . . . . . . 41 221 -- -- -- --
Preferred stock dividend . . . . . -- -- -- -- (43) --
Foreign currency translation . . . -- -- -- -- -- 136
----------- ------------- ---------- ------------ ------------- ------------
BALANCE, January 1, 1998 . . . . . . 27,662 49,694 4,324 854 7,407 86
Net income for the year . . . . . -- -- -- -- 19,799 --
Common stock repurchased . . . . . (106) (424) -- -- (1,492) --
Common stock issued for 401(k)Plan. 9 116 -- -- -- --
Common stock acquired through
Employee Stock Purchase Plan . . 56 838 -- -- -- --
Common stock issued on the
exercise of warrants . . . . . . 6 22 -- -- -- --
Common stock issued on the
exercise of options . . . . . . . 347 3,885 -- -- -- --
Preferred stock dividend. . . . . . -- -- -- -- (43) --
Foreign currency translation. . . . -- -- -- -- -- (245)
----------- -------------- ---------- ---------- -------------- -----------
BALANCE, December 31, 1998 . . . . . 27,974 $54,131 4,324 $ 854 $25,671 $ (159)
----------- -------------- ---------- ---------- -------------- -----------
----------- -------------- ---------- ---------- -------------- -----------
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-7
- --------------------------------------------------------------------------------
LABOR READY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
--------------- -- ---------------- -- -----------------
1998 1997 1996
--------------- ---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . $19,799 $ 6,963 $ 724
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . 6,076 4,011 1,797
Loss (gain) on capital assets sold . . . . . . . . (14) (76) 4
Provision for bad debts. . . . . . . . . . . . . . . 8,274 5,761 2,078
Extinguishment of debt, extraordinary item . . . . . -- -- 1,901
Deferred income taxes. . . . . . . . . . . . . . . . (3,996) (3,832) 191
Changes in assets and liabilities
Accounts receivable . . . . . . . . . . . . . . . . (37,157) (21,279) (10,906)
Workers' compensation deposits and credits . . . . . (1,880) 7,183 (4,950)
Prepaid expenses and other . . . . . . . . . . . . . (2,304) (676) (1,382)
Accounts payable . . . . . . . . . . . . . . . . . 3,306 1,605 1,161
Accrued wages and benefits. . . . . . . . . . . . . 3,492 1,035 1,458
Workers' compensation claims reserve. . . . . . . . 12,053 8,494 3,133
Income taxes payable (receivable) . . . . . . . . . 5,715 2,121 (2,356)
--------------- ---------------- -----------------
Net cash provided by (used in) operating activities . . 13,364 11,310 (7,147)
--------------- ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . (9,452) (3,967) (5,750)
Proceeds from sale of capital assets . . . . . . . 160 120 9
(Increase) decrease in restricted cash. . . . . . . (15) 1,579 (1,715)
(Increase) decrease in intangible assets and other. 143 (2,595) (3,558)
--------------- ---------------- -----------------
Net cash used in investing activities . . . . . . . . . (9,164) (4,863) (11,014)
--------------- ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on note payable. . . . . . . . . . . . -- -- (1,591)
Checks issued against future deposits . . . . . . . -- (1,139) 625
Payments on capital leases . . . . . . . . . . . . . (565) -- --
Net proceeds from public offering. . . . . . . . . . -- -- 33,586
Proceeds from warrants exercised . . . . . . . . . . 22 110 --
Proceeds from options exercised . . . . . . . . . . 1,650 170 805
Proceeds from sale of stock through employee stock
purchase plan . . . . . . . . . . . . . . . . . . 838 375 --
Purchase and retirement of treasury stock . . . . . (1,916) (1,395) --
Repayment of subordinated debt . . . . . . . . . . -- -- (2,070)
Payments on long-term debt . . . . . . . . . . . . . (89) (13) (891)
Preferred stock dividends paid. . . . . . . . . . . (86) -- (43)
--------------- ---------------- -----------------
Net cash (used in) provided by financing activities (146) (1,892) 30,421
Effect of exchange rates on cash . . . . . . . . . . (231) (36) (21)
--------------- ---------------- -----------------
Net increase in cash and cash equivalents . . . . . 3,823 4,519 12,239
CASH AND CASH EQUIVALENTS, beginning of year . . . . . 22,117 17,598 5,359
--------------- ---------------- -----------------
CASH AND CASH EQUIVALENTS, end of year. . . $25,940 $22,117 $17,598
--------------- ---------------- -----------------
--------------- ---------------- -----------------
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-8
- --------------------------------------------------------------------------------
LABOR READY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
---------------- -- ---------------- -- ----------------
1998 1997 1996
---------------- ---------------- ----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . $ 813 $ 30 $ 332
Income taxes . . . . . . . . . . . . . . . . $11,882 $7,979 $2,859
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Contribution of common stock to 401(k) Plan $ 116 $ 81 $ 48
Issuance of a note receivable on the sale of
capital assets . . . . . . . . . . . . . . . -- -- $ 23
Issuance of common stock on debt retirement -- -- $7,961
Preferred stock dividends accrued . . . . . . -- $ 43 --
Tax effect of disqualifying dispositions on
options exercised. . . . . . . . . . . . . . $2,235 $ 51 --
Assets acquired with capital lease obligations $6,393 -- --
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-9
- --------------------------------------------------------------------------------
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
Labor Ready, Inc. and its wholly-owned subsidiaries Labour Ready Temporary
Services Ltd., Labor Ready Puerto Rico, Inc., Labor Ready Assurance Company and
Workers' Assurance Corporation of Hawaii, Inc. (together, "the Company") provide
temporary staffing for manual labor jobs to customers primarily in the
industrial and small business markets from 486 offices located throughout the
United States, Canada and Puerto Rico. The Company provides services to a wide
variety of customers, none of which individually comprise a significant portion
of revenues within a geographic region or for the Company as a whole. The
consolidated financial statements include the accounts of Labor Ready, Inc. and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
B. REVENUE RECOGNITION
Revenue from the sale of services is recognized at the time the service is
performed. A portion of the Company's income is derived from franchise and cash
dispensing machine fees, which are insignificant for all years presented.
C. COST OF SERVICES
Cost of services includes the wages of temporary workers, related payroll
taxes, workers' compensation expenses and transportation.
D. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with a maturity
of three months or less at date of purchase to be cash equivalents.
E. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the respective assets,
which are 31 to 39 years for buildings and improvements, 3 to 5 years for
computers and software, 7 years for cash dispensing machines and 5 to 7 years
for furniture and equipment.
F. INTANGIBLE ASSETS AND OTHER
Intangible and other assets consist primarily of dispatch office pre-opening
costs and acquired customer lists and non-compete agreements. Dispatch office
pre-opening costs are capitalized until such facilities become operational and
are amortized using the straight-line method over an estimated useful life of 2
years. Other intangible assets are stated at cost and are amortized using the
straight-line method over periods not exceeding ten years. Management evaluates,
on an ongoing basis, the carrying value of intangible assets and makes a
specific provision against the asset when an impairment is identified.
G. INCOME TAXES
Deferred income taxes are provided for temporary differences between the
financial statement and income tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the temporary differences are expected
to reverse. If it is more likely than not that some portion of a deferred tax
asset will not be realized, a valuation allowance is recorded.
- --------------------------------------------------------------------------------
F-10
- --------------------------------------------------------------------------------
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. FOREIGN CURRENCY TRANSLATION
Cumulative foreign currency translation adjustment relates to the Company's
consolidated foreign subsidiary, Labour Ready Temporary Services, Ltd. Foreign
currency translation is calculated by application of the current rate method and
is included in the determination of consolidated shareholders' equity at the
respective balance sheet dates.
I. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
J. NEW ACCOUNTING STANDARDS
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-5, "Reporting on the Costs of Start-up Activities" ("the
Statement"). The Statement establishes new rules for the financial reporting of
start-up costs, and will require the Company to expense the cost of establishing
new dispatch offices as incurred and write off, as a cumulative effect of
adopting the Statement, any remaining capitalized pre-opening costs in the first
quarter of the year adopted. The Statement is effective for years beginning
after December 31, 1998 and the Company will adopt it in the first quarter of
1999. The effect of adopting the Statement will be to recognize a non-operating
expense, net of tax, of approximately $1.4 million.
SFAS No. 130 "Reporting Comprehensive Income" establishes standards for
reporting and disclosure of comprehensive income. SFAS No. 130 became effective
during 1998. Comprehensive income for the Company includes charges or credits to
equity resulting from foreign currency translation adjustments. Net income and
comprehensive income were not significantly different in 1998, 1997 and 1996.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", requires the Company to report certain information about operating
segments. SFAS No. 131 became effective for the Company's year ended December
31, 1998. The Company provides services to customers primarily in the freight
handling, warehousing, landscaping, construction and light manufacturing
industries, none of which indiviually comprise a significant portion of revenues
within a geographic region for the Company as a whole. Virtually all of the
Company's sales are made to customers in the United States. The remaining sales
are made to customers in Canada and Puerto Rico.
- --------------------------------------------------------------------------------
F-11
- --------------------------------------------------------------------------------
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
2. WORKERS' COMPENSATION
The Company provides workers' compensation insurance to its temporary workers
and regular employees. For workers' compensation claims originating in the
majority of states (the 43 non-monopolistic states), the Company has purchased a
deductible insurance policy. Under terms of the policy, the Company's workers'
compensation exposure is limited to a deductible amount per occurrence and a
maximum aggregate stop-loss limit. Should any single occurrence exceed the
deductible amount per occurrence, all losses and expenses beyond the deductible
amount are paid by independent insurance companies unrelated to the Company.
Similarly, should the total of paid losses related to any one year period exceed
the maximum aggregate stop-loss limit for that year, all losses beyond the
maximum aggregate stop-loss limit are paid by independent insurance companies
unrelated to the Company. In 1997, the per occurrence deductible amount was
$250,000 per claim, to an aggregate maximum of $11.60 per $100 of temporary
worker payroll, or $18.8 million. For claims arising in 1998, the per occurrence
deductible amount was increased to $350,000 and the maximum aggregate stop-loss
limit was reduced to $10.41 per $100 of temporary worker payroll, or $31.7
million.
For claims arising in years prior to 1997, the Company has insured all losses
beyond amounts reserved in its financial statements with independent insurance
companies unrelated to the Company. The difference between the discounted
maximum aggregate stop-loss limit for claims arising in 1997 and 1998 and the
total of claims paid and reserved for in the Company's financial statements for
the same periods is $4.0 million. This amount represents the discounted maximum
additional exposure, net of tax, to the Company before its maximum aggregate
stop-loss limits are met for all periods before December 31, 1998.
The Company establishes its reserve for workers' compensation claims using
actuarial estimates of the future cost of claims and related expenses that have
been reported but not settled, and that have been incurred but not reported.
Adjustments to the claims reserve are charged or credited to expense in the
periods in which they occur. Included in the accompanying consolidated balance
sheets as of December 31, 1998 and 1997, are workers' compensation claims
reserves in the non-monopolistic states of $24.4 million and $12.9 million,
respectively. The claims reserves were computed using a discount rate of 6.0% at
December 31, 1998 and 1997.
Workers' compensation expense totaling $30.6 million, $19.2 million and $10.0
million was recorded as a component of cost of services in each of the years
ended December 31, 1998, 1997 and 1996, respectively.
For the 1997 and 1998 program years, the Company is required to provide
collateral in the amount of the maximum aggregate stop-loss limits, less claims
paid to date. The Company provides approximately 50% of the required collateral
in the form of a surety bond, and 50% in letters of credit. Accordingly, at
December 31, 1998, $14.5 million of the collateral was satisfied with surety
bonds and $12.6 million was satisfied with letters of credit for the years ended
December 31, 1998 and 1997.
For workers' compensation claims originating in Washington, Ohio, and West
Virginia (the monopolistic states), and Canada and Puerto Rico, the Company
pays workers' compensation insurance premiums as required by state
administered programs. The insurance premiums are established by each
jurisdiction, generally based upon the job classification of the insured
workers and the previous claims experience of the Company. The Washington
program provides for a retroactive adjustment of workers' compensation
payments based upon actual claims experience. Upon adjustment, overpayments to
the program are returned to the Company and underpayments, if any are
assessed. At December 31, 1998 and 1997, the Company recorded workers'
compensation credit receivables of $1.4 million and $1.1 million respectively,
and workers' compensation liabilities of $1.2 million and $0.6 million
respectively, related to the monopolistic states.
- --------------------------------------------------------------------------------
F-12
- --------------------------------------------------------------------------------
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
2. WORKERS' COMPENSATION (CONTINUED)
In December 1998, the Company purchased a deductible insurance policy for the
non-monopolistic states covering the years ended 1999 and 2000. The policy
includes substantially the same terms and limitations as the 1998 policy
described above except that the Company is required to provide collateral in the
amount of 60% of claims reserves. The collateral for the 1999 program will
consist of 50% letters of credit and 50% surety bond. Accordingly, subsequent to
year end, the Company provided the insurance carrier with a letter of credit
totaling $4 million and a surety bond for $12.5 million. During 1999, the total
amount of the letters of credit and surety bonds for the 1999 program year will
increase to approximately $24.0 million.
The Company has established a risk management department at its corporate
headquarters to manage its insurers, third party claims administrators, and
medical service providers. To reduce wage-loss compensation claims, the Company
employs claims coordinators throughout the United States. The claims
coordinators manage the acceptance, processing and final resolution of claims
and administer the Company's return to work program. Workers in the program are
employed on customer assignments that require minimal physical exertion or
within the Company in the local dispatch office. The Company has an on-line
connection with its third party administrator that allows the claims
coordinators to maintain visibility of all claims, manage their progress and
generate required management information.
3. NOTE PAYABLE
During 1998, the Company entered into a line-of-credit agreement with a bank
with interest at the bank's prime rate (7.75% at December 31, 1998). The
agreement allows the company to borrow up to the lesser of $40.0 million or 80%
of eligible receivables as defined by the bank. The line-of-credit is secured
primarily by the Company's accounts receivable and expires in June 2000. The
line-of-credit agreement requires that the Company maintain minimum net worth
and working capital amounts. The Company was in compliance with the requirements
at December 31, 1998. Subsequent to year end, the Company entered into a new
line-of-credit agreement with the bank on substantially the same terms but which
increases the Company's borrowing limit to $60.0 million.
As discussed further in Note 2, the Company is required by the workers'
compensation program to collateralize a portion its workers' compensation
liability with irrevocable letters of credit. At December 31, 1998, the Company
had provided its insurance carriers with letters of credit totaling $12.6
million. The letters of credit bear fees of .75% per year and are supported by
an equal amount of available borrowings on the line-of-credit. Accordingly, at
December 31, 1998, no borrowings were outstanding on the line-of-credit, $12.6
million was committed by the letters of credit and $27.4 million was available
for borrowing. Subsequent to year end, the Company increased its letters of
credit outstanding by $4.0 million.
During the years ended December 31, 1998 and 1997, short-term borrowing
activity was as follows:
December 31,
-----------------------
1998 1997
----------- ---------
Balance outstanding at year-end ........................................... $ -- $ --
Stated interest rate at year-end, including applicable fees ............... 7.75% 8.63%
Maximum amount outstanding during the year ................................ $ 19,475 $ 1,700
Average amount outstanding ................................................ $ 5,486 $ 1,200
Weighted average interest rate during the year, including applicable fees . 8.10% 11.50%
The average amount outstanding and the weighted average interest rate during
the year were computed based upon the average daily balances and rates.
- --------------------------------------------------------------------------------
F-13
- --------------------------------------------------------------------------------
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
4. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income less preferred
stock dividends by the weighted average number of common shares outstanding
during the year. Diluted earnings per share is computed by dividing net income
less preferred stock dividends by the weighted average number of common shares
and common stock equivalents outstanding during the year. Common stock
equivalents for the Company include the dilutive effect of outstanding options.
In July 1996, October 1997 and May 1998, the Company declared three-for-two
stock splits which have each been retroactively applied in the determination of
weighted average shares outstanding.
Basic and diluted earnings per share were calculated as follows:
---------------- -- ---------------- -- ----------------
1998 1997 1996
---------------- ---------------- ----------------
Basic:
Income before extraordinary item . . . . . . . $ 19,799 $ 6,963 $ 1,922
Less preferred stock dividends. . . . . . . . 43 43 43
---------------- ---------------- ----------------
Income before extraordinary item available to
common shareholders . . . . . . . . . . . . $ 19,756 $ 6,920 $ 1,879
---------------- ---------------- ----------------
Weighted average shares outstanding . . . . . 27,796 27,669 23,798
---------------- ---------------- ----------------
Income before extraordinary item per share . $ .71 $ .25 $ .08
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Diluted.:
Income before extraordinary item available to
common shareholders. . . . . . . . . . . . . $ 19,756 $ 6,920 $ 1,879
Weighted average shares outstanding . . . . . 27,796 27,669 23,798
Plus options to purchase common stock
outstanding at end of year. . . . . . . . . 2,182 2,033 937
Less shares assumed repurchased . . . . . . . (1,312) (1,535) (302)
---------------- ---------------- ----------------
Weighted average shares outstanding, including
dilutive effect of options. . . . . . . 28,666 28,167 24,433
---------------- ---------------- ----------------
Income before extraordinary item per share . $ .69 $ .25 $ .08
---------------- ---------------- ----------------
---------------- ---------------- ----------------
5. SUBORDINATED DEBT
In October 1995, the Company issued subordinated debt with detachable stock
warrants for the purchase of 2,505 shares at an exercise price of $3.46 per
share, in exchange for $10,000. In September 1996, the Company repaid the
outstanding balance of the subordinated debt and accelerated the exercise date
of the detachable stock warrants to allow immediate exercise at a price of $3.46
per share. Upon pre-payment, 2,303 shares of common stock were purchased through
the exercise of detachable stock warrants and the cancellation of $7,961 of
subordinated debt. The remaining $2,039 of debt was paid by the Company in cash.
An extraordinary loss of $1,197 (net of the related income tax benefit of $703)
was recorded on the write-off of the unamortized debt discount and debt issue
costs. As of December 31, 1998, warrants to purchase 43 shares of common stock
at an exercise price of $3.46 per share remained outstanding.
- --------------------------------------------------------------------------------
F-14
- --------------------------------------------------------------------------------
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
6. RELATED PARTY TRANSACTIONS
A member of the board of directors, is also a shareholder in a law firm
that received approximately $429, $587 and $337 in payment for legal services
performed for the Company in 1998, 1997 and 1996, respectively.
7. PREFERRED STOCK
The Company has authorized 20,000 shares of blank check preferred stock. The
blank check preferred stock is issuable in one or more series, each with such
designations, preferences, rights, qualifications, limitations and restrictions
as the board of directors of the Company may determine and set forth in
supplemental resolutions at the time of issuance, without further shareholder
action.
The initial series of blank check preferred stock of the corporation
authorized by the board of directors in accordance with the articles of
incorporation, was designated as Series A preferred stock. At December 31, 1998
and 1997, the Company had 4,324 outstanding shares of $0.197 par value Series A
preferred stock.
Each share of Series A preferred stock is entitled to one vote in all matters
submitted to a vote of the shareholders of the Company. The Series A preferred
stock will vote on par with the Common Shares as a single class unless the
action being considered involves a change in the rights of the Series A
preferred stock. The Series A preferred stock bears a cumulative annual dividend
rate of five percent accrued on December 31 of each year, is redeemable at par
value plus accumulated dividends at the option of the Company at any time after
December 31, 1994, and contains an involuntary preferential liquidation
distribution equivalent to the par value plus all accumulated dividends
remaining unpaid.
In July 1996, October 1997 and May 1998, the board of directors authorized
three-for-two preferred stock splits. These preferred stock splits were effected
in the form of three shares of preferred stock issued for every two shares of
preferred stock outstanding as of each date of declaration. All applicable share
and per share data have been adjusted for the effect of the stock splits.
Pursuant to the Rights Plan discussed further in Note 8, 375 shares of
preferred stock have been reserved for issuance under terms of the Plan.
A preferred stock dividend in the amount of $43 was accrued and paid at
December 31, 1998 and 1996. The 1997 preferred stock dividend in the amount of
$43 was accrued at December 31, 1997 and paid in January 1998.
8. COMMON STOCK
In July 1996, October 1997 and May 1998, the Board of Directors authorized
three-for-two common stock splits. These common stock splits were effected in
the form of three shares of common stock issued for every two shares of common
stock outstanding as of the date of declaration. All applicable share and per
share data have been adjusted for the effect of each of these stock splits.
In connection with the issuance of the $10,000 subordinated debt in 1995, the
Company issued options and warrants to purchase 2,505 shares of Common Stock at
an exercise price of $3.46 per share. 2,303 of these warrants were exercised as
a result of the Company's prepayment of the subordinated debt in September 1996
(see Note 5).
- --------------------------------------------------------------------------------
F-15
- --------------------------------------------------------------------------------
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
8. COMMON STOCK (CONTINUED)
In June 1996, the Company successfully completed the sale of 5,046 shares of
common stock, through an underwritten public offering, at a price of $7.26 per
share ($6.77 net of underwriting costs). In connection with the public offering,
the Company incurred costs of approximately $574, which were offset against the
common stock sale proceeds. These net proceeds were used to prepay debt,
purchase the home office building in Tacoma, Washington, fund workers'
compensation deposits, and fund the opening of new dispatch offices.
During 1998 and 1997, the Company repurchased 106 and 344 shares of common
stock on the open market for cash consideration of $1,916 and $1,395,
respectively. The repurchased shares were retired and are not available for
reissuance. Excess acquisition cost over the average per share carrying value of
common stock is charged to retained earnings.
In 1998, the board of directors adopted a Shareholders Rights Plan ("the
Rights Plan") and declared a dividend distribution of one right for each
outstanding share of the Company's common stock. Under the terms of the Rights
Plan, each Right entitles the holder to purchase one one-hundredth of a share of
the Series A preferred stock at an exercise price of $113.06. The rights are
exerciseable a specified number of days following (1) the acquisition by a
person or group of persons of 15% or more of the Company's common stock, or (2)
the commencement of a tender or exchange offer for 15% or more of the Company's
common stock. The Company has reserved 375 shares of the Series A Preferred
stock for issuance upon exercise of the rights. The rights may be redeemed by
the Company, subject to the approval of the board of directors, for $.01 cents
per right in accordance with the provisions of the Rights Plan. If any group or
person acquires 50% or more of the Company's common stock, the holders of the
unredeemed rights (except for the acquiring group or person) may purchase for
the exercise price, the number of common shares having a market value equal to
two times the exercise price. The rights expire in January 2008, unless redeemed
earlier by the Company.
9. INCOME TAXES
Temporary differences, which give rise to deferred tax assets (liabilities)
consist of the following:
December 31,
1998 1997
-------------------- ------------------
Allowance for doubtful accounts. . . . . . . . . . . . . . . $1,587 $1,072
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . (456) (216)
Workers' compensation credits receivable . . . . . . . . . (527) (433)
Workers' compensation claims reserve. . . . . . . . . . . . 8,724 5,075
Net operating loss carry-forwards, net of valuation
allowances of $489 and $691. . . . . . . . . . . . . . . . 468 115
Depreciation and amortization expenses . . . . . . . . . . . (1,666) (1,478)
Vacation accrual. . . . . . . . . . . . . . . . . . . . . . 344 228
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (122) (7)
------------------ ------------------
Net tax deferrals. . . . . . . . . . . . . . . . . . . . . . 8,352 4,356
Non-current deferred tax (liabilities) assets, net. . . . . 1,751 1,212
------------------ ------------------
Current deferred tax assets, net . . . . . . . . . . . . . . $6,601 $3,144
------------------ ------------------
------------------ ------------------
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F-16
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LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
9. INCOME TAXES (CONTINUED)
The Company has assessed its past earnings history and trends, budgeted
sales, expiration dates of loss carry-forwards, and its ability to implement tax
planning strategies which are designed to accelerate or increase taxable income.
Based on the results of this analysis, no valuation allowance on net deferred
tax assets has been established for Labor Ready, Inc. as management believes
that it is more likely than not that the net deferred tax assets will be
realized.
At December 31, 1998, Labour Ready Temporary Services, Limited has federal
net operating loss carryforwards of approximately $1.0 million with expiration
dates through 2005. During 1998, the Company reduced the valuation allowance
related to the net operating loss carryforwards recorded in prior years by $177.
The reduction reflects the Company's expectation that it is more likely than not
that it will generate future taxable income in Canada to utilize the
carryforwards.
As of December 31, 1998, Labor Ready, Inc. has net operating loss
carry-forwards of approximately $590, the majority of which expire in 2006 as
applicable federal tax regulations limit the Company to an annual deduction of
approximately $26. The company has recognized a valuation allowance on the
portion expiring in 2006.
Taxes on income consists of:
Year Ended December 31,
-------------------------------------------------------------
1998 1997 1996
-------------------- --------------- --------------
Current:
Federal . . . . . . . . . . . . . . . . . . . $14,077 $7,603 $603
State . . . . . . . . . . . . . . . . . . . . 3,510 1,788 88
------------------ ----------------- ----------------
Total Current . . . . . . . . . . . . . . . . . . 17,587 9,391 691
------------------ ----------------- ----------------
Deferred
Federal . . . . . . . . . . . . . . . . . . . (3,454) (3,259) 167
State. . . . . . . . . . . . . . . . . . . . . (542) (573) 24
------------------- ---------------- ----------------
Total deferred . . . . . . . . . . . . . . . . . (3,996) (3,832) 191
------------------- ---------------- ----------------
Total taxes on income, including $703 tax benefit
of extraordinary item in 1996 . . . . . . . . $13,591 $5,559 $882
------------------ ----------------- ----------------
------------------ ----------------- ----------------
The differences between income taxes at the statutory federal income tax rate
and income taxes reported in the consolidated income statement are as follows:
Year Ended December 31,
1998 1997 1996
---------------------- --------------------- --------------------
AMOUNT % AMOUNT % AMOUNT %
----------- ----- ------------- ---- ----------- -----
Income tax expense based on statutory rate . $11,686 35 $4,383 35 $546 34
Increase (decrease) resulting from:
State income taxes, net of federal benefit. . 1,740 5 697 6 59 4
Prior year amounts. . . . . . . . . . . . . . -- -- 487 4 169 11
Other, net 165 1 (8) (1) 108 6
----------- ----- ------------- ----- ----------- -----
----------- ----- ------------- ----- ----------- -----
Total taxes on income. . . . . . . . . . . . $13,591 41 $5,559 44 $882 55
----------- ----- ------------- ----- ----------- -----
----------- ----- ------------- ----- ----------- -----
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F-17
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LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
10. COMMITMENTS AND CONTINGENCIES
The Company leases substantially all of its dispatch offices. These leases
generally provide for termination on 30 days notice and upon payment of three
months rent. Certain of these leases have 1 year minimum terms and are
cancelable thereafter upon 30 days notice and the payment of three months rent.
Many leases require additional payments for taxes, insurance, maintenance and
renewal options. Minimum lease commitments under terms of the leases at December
31, 1998 total approximately $4.2 million, substantially all of which would be
payable in 1999. Rent expense for the years ended December 31, 1998, 1997 and
1996 was $9,019, $5,026 and $2,347, respectively.
In December 1997, the Company entered into a lease agreement for automated
Cash Dispensing Machines ("CDM") for installation in the Company's dispatch
offices. The lease, which is classified as a capital lease, is payable over 84
months with an imputed interest rate of 9.2% and is secured by the CDMs.
Cost and accumulated amortization of the CDMs are as follows at December 31,
1998:
Cash dispensing machines . . . . . . . . . . . $6,393
Less accumulated amortization . . . . . . . . 604
----------------
$5,789
----------------
----------------
Future minimum lease payments under capital leases together with the present
value of the minimum lease payments as of December 31, 1998 are as follows:
Year ended December 31:. . . . . . . . . . .
1999. . . . . . . . . . . . . . . . . . . . $1,304
2000. . . . . . . . . . . . . . . . . . . . 1,304
2001. . . . . . . . . . . . . . . . . . . . 1,304
2002. . . . . . . . . . . . . . . . . . . . 1,304
2003. . . . . . . . . . . . . . . . . . . . 1,304
Thereafter 1,690
----------------
Total minimum lease payments. . . . . . . . . 8,210
Less executory costs. . . . . . . . . . . . . 399
----------------
Net minimum lease payments. . . . . . . . . . 7,811
Less imputed interest . . . . . . . . . . . . 1,984
----------------
$5,827
----------------
----------------
The Company is, from time to time, involved in various lawsuits arising in
the ordinary course of business. Although there can be no absolute assurance, in
the opinion of management, these will not have a material effect on the
Company's consolidated results of operations or financial condition.
In 1995, the Company entered into an employment agreement with its President
and CEO, which provides for annual compensation of $31 per month at inception of
the agreement, subject to annual increases on the anniversary date of the
agreement of 10% of the prior period's base salary. In addition, the employment
agreement provides for a bonus, as determined by the compensation committee,
based on the President's performance, and the overall performance of the
Company. The agreement expired in 1998, and subsequent to year end, the Company
reached an agreement with its President for the renewal of his employment
agreement on substantially similar terms through December 31, 2003.
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F-18
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LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
11. RETIREMENT PLAN
In 1994, the Company established a 401(k) savings plan ("the Plan").
Qualifying employees can elect to contribute up to 15% of their annual
compensation to the Plan. Profit sharing contributions are made at the
discretion of the Company's Board of Directors and have been made in the form of
the Company's common stock. Employees are eligible to participate in the Plan
the calendar quarter following the completion of one year of service. Employees
are fully vested in matching contributions made to the Plan after completing
five years of service. The amount charged to expense under the Plan was $178,
$118 and $82 for the years ended December 31, 1998, 1997 and 1996, respectively.
12. VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts activity was as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1998 1997 1996
-------------------- --------------- --------------
Balance, beginning of year . . . . . . . . . . . $2,851 $1,237 $ 869
Charged to expense . . . . . . . . . . . . . . . 8,274 5,761 2,078
Write-offs, net of recoveries . . . . . . . . . (6,907) (4,147) (1,710)
------------------ ----------------- ----------------
------------------ ----------------- ----------------
Balance, end of year. . . . . . . . . . . . . . . $4,218 $2,851 $1,237
------------------ ----------------- ----------------
------------------ ----------------- ----------------
13. EMPLOYEE STOCK PURCHASE PLAN
In November, 1996, the Company adopted an Employee Stock Purchase Plan (the
"ESPP") to provide substantially all employees who have completed six months of
service and meet certain limited qualifications, relative to weekly total hours
and calendar months worked, an opportunity to purchase shares of its common
stock through payroll deductions. The ESPP permits payroll deductions up to 10%
of eligible after-tax compensation. Participant account balances are used to
purchase shares of common stock at the lesser of 85% of the fair market value of
shares on either the first day or the last day of each month. The ESPP provides
that no participant shall purchase stock that the aggregate fair market value
exceeds $25 during any calendar year. The ESPP expires on June 30, 2001. 1,238
shares of common stock have been reserved for purchase under the ESPP. During
1998 and 1997, 56 and 79 shares were purchased by participants in the plan for
cash proceeds of $838 and $375, respectively.
14. STOCK COMPENSATION PLANS
In June, 1996, the Company adopted the 1996 Employee Stock Option and
Incentive Plan (the "Plan"). In accounting for the Plan, the Company applied APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. Under APB Opinion No. 25, because the exercise price of the
Company's employee stock options is not less than the market price of the
underlying stock at the date of grant, no compensation cost is recognized.
The Plan states that the exercise price of each option may or may not be
granted at an amount that equals the market value at the date of grant. The
majority of the options vest evenly over a four year period from the date of
grant and then expire if not exercised within five years from the date of grant.
2,888 shares of common stock have been reserved for issuance under terms of the
Plan.
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F-19
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LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
14. STOCK COMPENSATION PLANS (CONTINUED)
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", requires the Company to provide pro forma information
regarding net income and earnings per share as if compensation cost for the
Company's stock option plans had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. The fair value of option grants
is estimated on the date of grant utilizing the Black-Scholes option pricing
model with the following weighted average assumptions for grants in 1998, 1997
and 1996, respectively: expected life of options of 5 years, expected volatility
of 88%, 67%, and 11%, risk-free interest rates of 5.0%, 6.0% and 6.0%, and a 0%
dividend yield.
Under the provisions of SFAS No. 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996
--------------------- -------------------- ---------------------
Net Income
As reported $19,799 $6,963 $724
Pro forma $16,401 $6,159 $352
Pro forma earnings
per share
Basic $ 0.59 $ 0.22 $ 0.01
Diluted $ 0.57 $ 0.22 $ 0.01
The following table summarizes stock option activity:
Year Ended December 31,
1998 1997 1996
---------------------- --------------------- --------------------
(1) (1) (1)
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------- --------- ------- --------- -------
Outstanding at beginning of year . . . . . . 2,033 $6.97 937 $5.43 3,400 $3.19
Granted 782 $19.44 1,276 $8.31 628 $6.49
Exercised. . . . . . . . . . . . . . . . . . (281) $5.04 (73) $3.86 (2,941) $2.94
Expired or canceled. . . . . . . . . . . . . (356) $13.10 (107) $5.03 (150) $1.30
--------- ------- --------- ------- --------- -------
Outstanding at end of year. . . . . . . . . . 2,178 $10.98 2,033 $6.97 937 $5.43
--------- ------- --------- ------- --------- -------
--------- ------- --------- ------- --------- -------
Exercisable at end of year. . . . . . . . . . 572 $6.63 477 $4.65 98 $2.44
--------- ------- --------- ------- --------- -------
--------- ------- --------- ------- --------- -------
Weighted average fair value of options
granted. . . . . . . . . . . . . . . . . . . $14.08 $7.86 $9.72
------- ------- -------
------- ------- -------
(1) Weighted average exercise price.
At December 31, 1998, 710,000 shares of the Company's common stock were
available for future grant under the Company's stock option plan.
- --------------------------------------------------------------------------------
F-20
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LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
14. STOCK COMPENSATION PLANS (CONTINUED)
Information relating to stock options outstanding and exercisable at December
31, 1998 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ----------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF PRICES NUMBER AVERAGE CONTRACTUAL AVERAGE EXERCISE NUMBER AVERAGE
OUTSTANDING LIFE PRICE EXERCISABLE EXERCISE PRICE
- ------------------ ------------ ---------------------- ----------------- ------------- ----------------
$0.88 - 8.89 1,205 3.10 5.71 479 5.25
12.33 - 18.08 813 4.10 16.10 91 13.58
21.61 - 29.53 160 4.38 24.64 2 21.61
------------ -------------
------------ -------------
$0.88 - 29.53 2,178 3.57 $10.98 572 $6.63
------------ -------------
------------ -------------
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F-21